Death of the Personal Budget
TL;DR: we’re all seeking the adrenalin of ‘success’. As a society we’re inclined to prioritize short feedback loops and the dopamine high of accomplishment. Our attention span to stay on task and change habits only to realize the payoff months/years/decades into the future is a fallacy and not what modern society promotes. The old way of balancing a chequebook, creating a budget, and subsequently reviewing each month is a forgone pipedream. Stop kidding yourself. Use the feedback loop that each day brings, embarrass the power of software automation, and start actually knowing what’s going on — Cash Flow. Simple.
Most personal finance products focus on the creation and tracking of a budget.
While this is a noble endeavor, as with many noble endeavors and intentions, if they are not easily actionable, they quickly fall by the wayside. So much time, forethought and attention needs to go into the creation and maintenance of a budget requiring a ton of pre-planning. Now if the ROI on this pre-planning is reasonable, then spending the extra time is not an issue. The problem, however, is that a budget is static whereas personal finances are incredibly dynamic, so perhaps our time could be better spent instead?
Because a budget must be regularly updated and balanced, it can also induce the very thing it is intended to alleviate: stress. The ongoing investment of “balancing the budget” time is often coupled with the anxiety of “being off track” which can then lead to pushing “budgeting day” off to the side and, eventually watching it settle to the bottom of the “To-Do” piles. I mean, after a few cycles of realizing that you’ve forgotten to reference or even update your budget when making material financial decisions, it’s easier to just give up. Budgets are noble but are they really sustainable and are they the best way to help folks become more mindful of their money?
The emphasis on telling people to just “Budget” feels so incredibly backwards and counterproductive.
In the beginning, it’s very exciting and you feel so organized; you are finally ready to get your finances in order! And this time it will stick. You google the best way to create a budget and then choose between excel, Mint, YNAB or one of the other countless tools on the app store. You’re ready to “get on track” and your mission is to figure out where your money is going because you have aspirations to save for a trip, a house purchase, or retirement. You do everything right: You set time aside to figure out what you’re spending, you forecast that into the future, you allocate an allotment of money to particular categories. I mean, this spreadsheet is golden, no one has ever made a spreadsheet quite this well before. At the end of the exercise, you feel like you’ve accomplished something and you now have a timeline to reach your goal with a defined spending plan. Might as well go house-hunting this afternoon- this budget is locked in. You’ve even put “Budget Planning” calendar alerts on your phone, so essentially, nothing can stop you. Awesome!
Now if you’re lucky, your newly created budget is connected to your various bank accounts so it updates automatically without the need for manual entry. After a few weeks, you decide to check it out, secure in your knowledge that things are on track and all is good in your financial world. Your eyes widen as you see the big red warning indicating that you’ve spent more than expected on groceries last week. After an initial panic, you calm yourself with the knowledge that you’ll simply spend less in the coming week. Problem solved. Thank goodness for that excel spreadsheet.
Then, another couple of weeks go by, you check it again and to your horror, things have gotten worse. You had forgotten to budget in those drinks with colleagues and the dinner out for your friend’s birthday. These oversights have created more Red hits and now your entertainment budget is painfully out-of-whack which will impact the rest of your budget. In order to right the ship, you need to go through every receipt and update all budget columns accordingly. This scenario plays out for a few more weeks, until (almost inevitably), the Budget Plan quietly falls to the wayside.
I hear this story all too often.
So I sat down and reflected on how I personally manage my finances along with how I’ve been successfully managing finances at the companies I work with. I found a common theme that helped to keep both my personal finances on track and those of the companies I work with; I create, monitor, and tweak cash flow plans while always keeping an eye towards goals. As much as we may create an annual budget, it quickly gets tucked away and we work off Cash Flow while tracking Goals and/or Targets.
Cash flow planning is reviewing the money you receive and the money you spend to ensure the timing of each will not cause your bank account to be in a negative position (no one wants to pay NSF fees!). For example, if you start with $0 and have a cell phone bill due on the 15th, but get paid on the 20th there is a cash flow problem! Cell phone bills do affect your credit score, so it is best not to wait till the 20th to pay this. With cash flow planning you identify this shortfall and then can look at alternatives to paying this bill late, such as moving money from another account to cover the shortfall. This is a basic example of cash flow planning and you can find a deeper dive here.
I know that cash flow planning is not a new concept and is typically used as a best practice for businesses rather than for personal finance, so when a search for “personal cash-flow planning tools” came up empty, I was disappointed but not overly surprised.
Armed with this information, we set out to design a dynamic process to automatically pull in bank account transactions, integrate them with machine learning to predict spending patterns. This would then allow us to create a user-friendly, automated Cash-Flow document that would ultimately help people to more mindfully manage their money.
Essentially, this would make it possible for someone to “see into the future”, and if needed, tweak discretionary spending, fixed spending, or both to alter future outcomes. This also creates the framework for achieving stated goals; because once you finally know where you’re at, you should make a point to always know where you are at. Once you know where the definitive starting point is, you gain valuable foresight and can stop constantly playing catch-up with the static budget.
Though the idea of knowing where your money is going and achieving financial goals in a pain-free, time-efficient manner may sound like a dream, I assure you it is not.
Billi is building these efficiencies directly into our app. Our members will never be left in the dark, will avoid the anxiety of seeing red numbers, and most importantly, will be able to proactively manage their finances rather than being in a stressful, reactive state. Expect to start seeing this in Billi come early 2022.
We live in a dynamic world, it’s time for us to dynamically manage our money rather than simply “hoping” we’ll get back on track.