Over the last fifteen years, spreadsheet programs, software, and web-based account aggregators have made it incredibly easy to warehouse our spending activity. Some of us have years and years of recorded transactions stored on our computers, ready for quick and easy access.
It’s important to know what the August 1998 water bill looked like, isn’t it?
One of those hard life lessons – not just a financial lesson – that we all have to learn is that we can’t do anything to change the past. (If we could, I would’ve changed my bad tailgating habit as a teenager that resulted in two fender benders and skyrocketing insurance premiums, but that’s another story for another time.)
From a planning standpoint, I find most people are reactive budgeters. We’ll use our nifty computer programs and spreadsheets to track every penny we spent previously, and then create a budget for the coming month using averages from the last year. We react in frustration when, in that next month, life and our spending don’t line up with “how we’ve always done it”.
The problem with this approach is that we’re greatly inhibiting our ability to control the flow of money in real time. No two months are ever the same: creating a homogenized, carbon-copy budget from old data removes our ability to proactively plan for what is going to happen. Reactive budgeting is rooted in looking backwards – you can’t react to what you’ve spent until you’ve spent it.
Instead, get on the front end of your budget. What is happening in the next two weeks or the next month that will require spending? How will you allocate money for that amidst all the other categories? Now you know what you will do with your money before you ever do it. Use your bell-and-whistle programs to simply organize and track how the money flows after you’ve created your plan, but let the past stay the past. It’s time to get back to the future.