Personal Finance 

Proactive Budgeting

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No one likes budgeting.

You might have come to appreciate the benefits of budgeting – that it makes your financial world more predictable, it helps get your finances back on track, [insert any of the well known benefits of budgeting]. You’d rather spend time with your family, or play video games, or play with your pets, or hang out with your friends. But we budget because it’s the right thing to do and we learn to love it. When you can’t do what you love, you try to love what you do.

That said, there are three phases in budgeting. The first phase is information collection, where you track how much you spend and begin to understand how much you spend on each category. The second phase is setting your budget and adhering to it. The third phase is one I call proactive budgeting, where you project forward and try to predict when your spending will change and account for that in future budgets.

This was on my mind because of all this talk about rising gas prices, a common topic every Spring, and how it might dampen consumer confidence and spending at stores like Wal-Mart (I listen to the news every morning as I make my coffee and breakfast).

Example of Proactive Budgeting

I just filled up my gas tank at Costco and paid around $3.50 a gallon to fill up 14 gallons. That’s $49 per fuel up, assuming I take it down to the last twenty miles, and a big line item in almost any budget. The last time I fueled up was about 18 days earlier (I work from home, so I drive very little) that so my budget for fuel around $3.30 a day (I just did $49 divided by 15 and rounded up to a nice roundish number). What happens if gas goes to $5 a gallon? My daily budget for gas should increase to $4.66.

Can I afford to shift $1.33 a day from some other category to gas? Yes, and by doing so proactively, I make sure I don’t let it quietly “bleed” away later one when gas prices rise.

Why Does This Matter?

If you have a lot of slack in your budget, adjusting for an extra dollar a day isn’t going to matter. It can bleed away from your savings and you wouldn’t be affected too much. There are, however, many budgets where that single dollar will matter. If you don’t budget and save an extra dollar a day for gas, that $70 gasoline hit is going to hurt. It’s going to stick on your credit card bill and accumulate into greater interest payments. It’ll be death by a thousand tiny cuts.

If you have a budget, it pays to start being proactive.

{ 13 comments, please add your thoughts now! }

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13 Responses to “Proactive Budgeting”

  1. David M says:

    I have plenty of money to do what I want thus I do not budget and do not feel like I should/need to budget. I realize that most people would think this makes no sense, however, it works great for my wife and myself.

    We spend what we spend and I save/invest the rest.

    Over time, extra dollars accumulate in our savings/checking account and we then invest more and/or pay more towards our mortgage. For example in 4 years we have paid off more than 40% of our mortgage ($320,000 down to $175,000).

    • Jim says:

      While I won’t fault you for your strategy, that only works when you have a large difference between your income and your potential expenses, which I think you’d agree. If you make $10,000 a year and your expenses are $2-3,000, then $5 gas and a budget won’t be as crucial to you as someone with $2,000 a month and expenses are $1500-2500. I think it’s about settling on a strategy that makes sense for you and yours obviously does.

      I think it makes perfect sense. 🙂

    • GERARD says:

      David M is so stupid, disrespectful to the site owner. If you have plenty of money what are you doing here!
      Get lost!
      You might one day lose it all!
      And might need to budget!

    • Shirley says:

      For those who seem to have a problem with the word ‘budget’, perhaps calling/thinking of that same system as a ‘log’ would be more appealing. It is simply an accounting of where your finances are going and whatever you decide to do with that information is then up to you.

  2. rlaw100 says:

    I take this approach too, instead of setting a budget, I take time to reflect on my purchases before I make them. Everything else goes into savings/investing.

    To me people who budget, have trouble keeping control of how much they spend. If they can do that, there’s probably no need to budget.

    • Jim says:

      I think budgeting is valuable to establish a baseline and then revisit whenever you make any major changes, like a raise, getting married, job change, move, etc.

    • But isn’t controlling what you spend the same as budgeting, but with a different process?

      When consumers set budgets, they’re anticipating their spending. When consumers control their spending, perhaps they have not laid out that they’ll buy X good and avoid purchasing Y or Z, but that’s what they end up doing.

  3. Martha says:

    I agree with Jim, it was very helpful for me when I started working, or had a major life change, to track what I spent in which categories (entertainment, car troubles, etc) so that I knew that if my “entertainment” budget was 30% of my total take home pay then I could save 5% towards a big trip that year and I wouldn’t cut into something else. Once I did it for a few months I was able to understand my overall spending needs/wants and I can now be more flexible with my budgeting.

  4. Sarah in Alaska says:

    I used to not budget. Spend what you spend, save what you save. But I’m a saver. I budget so that I will spend money.

    Ooh and my hubby and I hold budget meetings so we can plan our goals (i.e. we tweaked our retirement investing in favor of house savings this year). How do you know what you are saving for if you don’t have a budget?

    • Jim says:

      Budget meetings are crucial, just having conversations about money is very important because you need to be on the same page.

  5. Texas Wahoo says:

    “The last time I fueled up was about 18 days earlier (I work from home, so I drive very little) that so my budget for fuel around $3.30 a day (I just did $49 divided by 15 and rounded up to a nice roundish number).”

    Sorry to get off track, but fueling up after 18 days is driving very little? 14 gallons in 18 days is 3/4 of a gallon a day. That’s likely more than 15 miles a day, even with a low gas mileage car.

  6. Dave says:

    I wouldn’t say that I have plenty of money so I can spend what I want, but I have a similar approach. I have found that we are more successful if we try to limit what we spend, and the budgeting part works out. We don’t make big ticket items unless we have the money in the bank and just do our best to limit spending on an everyday basis.

    I’ve done budgets in the past and have found that they just don’t work for my wife and I.

  7. Wilma says:

    I don’t necessarily sit down and write out a budget. I look for ways every day to cut back on utilities or consumer goods, save money in an account or by cutting back, and reusing reusing reusing before recycling or throwing away. My life evolves around being conscious of and aware of budgeting money. You can’t live unconsciously day to day unaware of what your doing and make your paychecks stretch all year long. Daily due diligence is a must. Maybe not so much for David M (lucky you) but for the rest of us it is.

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