Cash Flow versus Budgeting

Cash Flow versus Budgeting

Drew Tignanelli

Drew Tignanelli

To me personal budgeting is a lot like dieting. If I diet and blow the diet, I eat even more. If I set a budget and then blow the budget, I spend even more. [Psychologically I already feel badly so why not just drown myself in the sorrow of my defeat.]

We know that people have different personalities and learning styles, and that we should not try to fit all people in the same mold, yet we do. When in truth, rather than one single path, there are a variety of ways to become successful at budgeting [or dieting].

For example, an alternative to budgeting is monitoring your cash flow. A cash flow analysis is not unlike weighing yourself while dieting. In my fifties as I found keeping the weight off more and more difficult, I tried dieting, but if I blew the diet the original weight was back, plus more. So one day I decided to apply the same technique that I use in budgeting, to monitor my weight. As a result I found myself determined to drop weight and my appetite subsided.

Most people do not balance their checkbook monthly, let alone keep a regular account of how they spend money weekly, monthly and yearly. And in fact, only monitoring your spending on an item-by-item purchase may leave you vulnerable to wasteful spending. For example, let’s say I buy lunch every day at work and my bi-weekly paycheck affords this expenditure. That is fine, but if you looked at the amount spent in a 12 month period [$1,500 or more] you may think twice as to whether you really can afford this luxury. Cash flow analysis forces you to look at repetitive purchases cumulatively in order to properly assess what is wise spending and what may just be a frivolous waste of income. [I am convinced Starbucks would not exist if every American maintained a cash flow analysis.] Proper realignment of spending enables greater debt repayment and/or greater monthly savings.

The simplest way to monitor cash flow is with online tool and/or app on your phone such as Mint.com or Quicken. After entering your user name and password, your sole responsibility is to categorize each expenditure and review the report weekly, monthly and yearly. For some using this technique, it will be a surprise as to how you might be wasting your hard earned income and how monitoring cash flow can help you to change your behavior.