Do you hate the idea of budgeting? Do your budgeting efforts typically fail or fall flat?
Not being able to stick to a budget is a common problem.
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Why do budgets fail?
For starters, you can’t stick to a budget you don’t have. A recent study reported 73% of Americans don’t even use a budget (1). Another report stated that, of those people who do create budgets, an overwhelming 84% of them have a hard time actually sticking to their budget (2). Budgeting efforts often fail, fall flat, or aren’t attempted to begin with for a few reasons.
Option 1 – You’re making budgeting too complicated
If you have zero extra hours in the day, you’re not alone. We’re all busy and the truth is, spending hours creating and managing your budget every month not only sounds miserable but also highly unrealistic. Your budgeting efforts may fail because you’re making budgeting too complicated by doing it in a way that is time-consuming, tedious, and, all in all, unsustainable.
Option 2 – You’re not making it complicated enough
Most people don’t know how to do the preparation and planning needed to make their budgeting efforts not only successful but also easy to manage. Your budget should be prepared in a way that makes using it easy bringing you closer and closer to achieving your goals. Having a budget alone that is vague and unactionable is another reason why budgets ofter fail.
Save Time (& Money) with a Cash Flow Plan
Many people who attempt to budget struggle and, eventually, fail. They go through the process of totaling their income and expenses, making a plan for everything to balance. Then, they go about their lives as usual letting their initial plans fall to the wayside. After the month is over and the budget is blown, they’ll say, “Budgeting just doesn’t work for me.”
Saying a budget doesn’t work for your money is like saying a piece of paper doesn’t work for making pictures. The truth is, paper can’t make anything, it’s just a tool. You make the picture. By combining the use of your hand with paper, pencil, and an image to create you are the creator.
By combining the use of an a budget, cash flow plan, and an account system (or framework for your money to flow through) you can create the life you envision. Going through the process of creating your cash flow plan and account system will take some effort up front, but will provide the framework your money needs to flow through in order to achieve your goals and allow you to live the way you want.
Budgeting vs Cash Flow Planning
Let’s look at some definitions:
A Budget (noun): an estimate of income and expenses for a set period of time.
To Budget (verb): allow or provide a particular amount of money for an expense
Budget (adjective): less expensive version of something
Cash Flow: the movement of money
Planning: the process of setting intention or decision about what one is going to do regarding the activities required to achieve a desired goal
Therefore,
Budgeting: estimating and allowing a particular amount of money to an expense based on an estimate of the total income and expenses for a set period (often achieved by purchasing a less expensive version of a product or service)
Cash Flow Planning: the process of setting intention or decision about the movement of money to achieve a desired goal
For example, you might total up your expenses and income only to find you’re spending more than you’re making on a monthly basis. You may need to budget (v.) (to provide less money to a given expense or category) by choosing budget (adj.) (less expensive) alternatives to your current spending. Your new budget (n.) (the estimate of income and expenses in a given time) should therefore balance allowing you to continue with your cash flow planning endeavors.
What is a Cash Flow Plan
There are similarities between budgeting and cash flow planning. However, a cash flow plan is the actual implementation or ‘How’ to your budget’s ‘What’. Your budget outlines what you estimate you’ll be able to accomplish with your money over a given period of time. Your Cash Flow Plan dictates how you’re going to carry out those estimates to achieve what you’ve set out to.
Imagine how a stencil guides a pencil along a path to create something great. Similarly, your cash flow plan guides your money through a process designed to create the life you want. Budgets often fail when they are not combined with a cash flow plan that gives action, intention, and structure to outlines and estimates.
How to Create a Cash Flow Plan
- Get all of your income and expense information together
- Categorize your expenses
- Total the cost of each expense category in a given month
- Establish what percentage of your minimum monthly income is needed to fund each category
- Use a system of accounts that gets funded with every paycheck based on previously established percentages
When you know the percentage of your income needs to go to a given expense and category, you no longer need to spend extra time tracking and planning month to month. You can simply assign the percentage of your income to a given category telling your money where to go.
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Steps to Creating a Cash Flow Plan
- First I create a budget by listing up your base income and expenses.
- Then I put those expenses into categories
- Now I add up how much money each category costs me
- I divide the category amount by my base monthly income to calculate each category’s percentage
- Finally, I establish and use either an account (or an envelope) system to automatically fund each category
When pay day comes around, I will NOT need to review my budget. I simply multiply my paycheck by the total category percentage and transfer the money needed to that account.
Here’s an example:
My paycheck amount is $2000.
I decide I want to have 6 categories that each have their own bank account:
- Fixed Survival Bills (i.e. Housing, utilities, etc.)
- Variable Survival Expenses (i.e. food, gas)
- Saving
- Giving/Generosity
- Lifestyle Bills (i.e. subscriptions, memberships, etc)
- Personal Spending
Fixed Surival Bills = 40% (or 0.4) therefore I multiply 2000 X 0.4 = $800
Variable Surival Expenses = 10% (or 0.1) therefore I multiply 2000 X 0.1 = $200
Savings = 15% (or 0.15) therefore I multiply 2000 X 0.15 = $300
Giving/Generosity = 10% (or 0.1) therefore I multiply 2000 X 0.1 = $200
Lifestyle Bills = 10% (or 0.1) therefore I multiply 2000 X 0.1 = $200
Personal Spending = 15% (or 0.15) therefore I multiply 2000 X 0.15 = $300
Now I simply transfer the money from my paycheck into each designated account. I won’t have to worry whether or not I have enough money to pay bills, how much I can spend on groceries, or if I’m able to buy that candle at Target. A quick glance at my system of accounts will tell me exactly what is available to spend!
Again, if you want more help establishing your cash flow system, I recommend joining CashFlow Overhaul. This program will help you create your cash flow system, simplify your money management, and get in control of your finances with ease!
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Make managing money easy
Here’s the beauty of cash flow planning, I only do steps 1-4 once. Step 5 is the only repeating task! By doing the initial planning and preparation, you would no longer need to create monthly budgets or do tedious tracking of daily transactions.
Even if you enjoy tracking your spending, that will become easier too. Your account system will pre-separate your expenses by categories. Plus, your monthly statements will no longer be a jumbled overview, but, instead, a detailed report reflecting your total funding and spending within a given category.
Budgeting is just a piece of cash flow planning (mainly steps 1-3). My budgeting efforts often fail because a budget alone is not actionable. Money, without a framework or system to flow through, is like water without a vessel. If I simply say I’m going to give water to 10 people but don’t have any cups to fill, I’m stuck either pouring the water directly into their mouths (which is tedious and difficult) or dumping it out and hoping they are able to slurp it all up (which is vague and inefficient).
My cash flow system creates ‘cups’ for me to pour in a predetermined amount ensuring that you can efficiently and conveniently fund each category.
Just like our childhood stencils provided an invaluable guide for creating recognizable pictures, a cash flow plan can guide our money management. While budgeting efforts may often fail due to complexity or lack of preparation, cash flow planning offers a more manageable and successful approach to money management.
Get started today by accessing your FREE template pack –> HERE
Recap: Make managing money easier with cash flow planning:
- Get all of your income and expense information together
- Categorize your expenses
- Total the cost of each expense category in a given month
- Establish what percentage of your minimum monthly income is needed to fund each category
- Use a system of accounts that gets funded with every paycheck based on previously established percentages
By following these steps, you can create a solid cash flow plan that directs your money effectively without the need for monthly budgeting or tracking. Cash flow planning simplifies money management while providing a clear roadmap for achieving financial goals.
Budgeting is just a component of cash flow planning. By understanding the differences between the two and utilizing a cash flow plan to make your budgeting efforts successful, you can better control your spending and work towards a brighter future. Remember, building a cash flow plan may require initial effort, but it sets the foundation for a more organized and successful financial journey.
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References:
- https://www.cnbc.com/2022/04/29/its-ok-to-not-follow-a-budget-says-a-financial-therapist.html#:~:text=Save%20and%20Invest-,73%25%20of%20people%20don’t%20regularly%20follow%20a%20budget%E2%80%94,OK%2C%20says%20a%20financial%20therapist&text=While%20a%20budget%20can%20help,to%20a%20regularly%20updated%20budget.
- https://www.nerdwallet.com/article/finance/data-2023-budgeting-report
