In the last decade the relationship between people and money has changed immensely. Through growing consciousness many have set out to reduce their debt, get rich(er) and find financial happiness. This marks the rise in popularity of different budgeting tools and applications. People started religiously logging their expenses, obsess about their spending and accepting constant alerts from their budgeting app — only to be the same way off financially as before.
After all, if financial wellbeing would be as easy as just using a budgeting app, why aren’t we all already living our best money-managing life yet?
In this article we are going to bust the myths around budgeting, and show you what you should really focus on to reach financial happiness.
Why budgeting doesn’t work?
Budgeting means preparing a detailed plan for your income and expenses, so you can determine in advance how much you can spend on certain items, leaving you space to save. It should allow you to always have enough money for the things you need, and create surplus to spend on things you want.
While this kind of planning sounds reasonable in theory, it does not really work in practice.
Here are the 3 main reasons why:
- Budget is hard to stick to and easy to ignore
Budgeting is very much like dieting — the best results come from small, conscious decisions made over a long period of time. Many people find it hard to stick to their designated spending categories, and can easily ignore another notification from a budgeting app about overspending their quota on matcha lattes. - Commitment heavy
Even though modern technology has made budgeting applications smarter and easier to use — no software is perfect. One still needs to invest a considerable amount of time to make the application work for them. Additionally, the real benefit of budgeting applications of identifying spending patterns would only be relevant if used for a long time. - Difficult to make it work on different scopes
As much as it would be great in life to have a constant line of expenses — that is often not the case. For example, you might need to get your car repaired, pay the yearly water bill or handle other expenses which are supporting your day to day life. These charges are hard to predict and can easily disrupt your nicely planned budget. - Budgeting becomes even harder when working as a freelancer or entrepreneur, as you would need to plan for your income as well, not just for your expenses.
- In a sense, budgeting is a bit like scratching our left ear with the right hand: trying to define where our money will go before even knowing what we will need to spend on, or what money we will have.
- What could truly help you is not budget- but cash flow management.
What is cash flow?
Let’s start with a definition for Corporate Finance Institute:
“Cash Flow (CF) is the increase or decrease in the amount of money a business, institution, or individual has.”
In simpler terms, cash flow is the amount of money coming in and going out of you in a certain period. A positive cash flow means that you are spending less than you earn — hence you can save money. Negative cash flow means that your expenses are higher than your income, and most likely you will need to cover the excess from another source.
Benefits of cash flow vs. budget
- Easier to manage
Efficiency in simplicity — this could not be more true when it comes to cash flow management. Instead of complex categorization, managing cash flow means only tracking how much money is coming in and out of your wallet monthly. - Cash pays the bills
While budgeting is great for creating a plan, reality often has another agenda. In situations when you need to cover unexpected expenses or lack of income, your liquidity is far more important than a budget. - Comparable in scope
Instead of comparing your 10–20 individual budgeting categories at the end of the month, you only need to define where your cash flow stood — positive, neutral or negative. This makes it easier to compare different perspectives throughout any period.
Cash flow above budget
At the end of the day, does it truly matter in granular detail what you spend on?
Experts all agree it does not.
We know we can live without the newest iPhone, buying another pair of shoes, a matcha latte. Spending hours on our budgeting app will not help us not make these expenses if we want to.
What truly matters is your cash flow — how your income compares to your expenses and how much you can save.
This approach also proves to be way more simple to incorporate in our daily lives than complex budget management.
In fact, millionaire Chris Reinig achieved full financial independence and retired at 39 without budgeting a day in his life — only with cash flow tracking.
Stay tuned for tips to reach better financial life and check out Fairlo’s guide to Cash Flow 101!
