It doesn't matter how much money you have, without a good cash-flow plan, it will not help you achieve the goals in life that make you happy. Thus it is important that you are able to manage your finances in ways that support your wealth building and the lifestyle you desire. To get started, most advisors recommend that you create a budget.
Budgeting refers to a method which sets limits on the amount of money that you are going to spend over a certain period of time. Dave Ramsey describes it as, 'budgeting is telling your money where to go instead of wondering where it went'. Budgeting is a great idea, however, although it is a one that most advisors will tell you to adopt, it often does not work, and here's three reasons why it doesn't.
First of all, budgets only focus on your expenses. It does not attempt to hold you accountable to your income, only to your spending. This happens to be the biggest downfall of budgets, because you can only cut back so far before you must start focusing on bringing in more income. In order to build wealth, you must master your cash flow. Your cash flow is the difference between what you bring in, and what you spend. If you spend less then you bring in, you can begin to build wealth with the excess.
The second reason budgets don't work is that when they are made, people tend to set unrealistic targets. It's much easier to estimate your future expenses by guessing, than it is by looking at what you actually spent over the last six months and projecting that forward. If the future looks bleak, it's easy to fudge with the numbers to make them work instead of facing the reality. So now you may have a budget that works on paper, but when you actually try to use it, there's probably a slim chance that you'll actually stick to it and make the cut-backs you proposed in your budget.
The third reason people often fail with budgeting, it makes it makes them feel guilty. It's like going on a diet, then sneaking that delicious desert. Once you've broken your promise to yourself, you have to live with the guilt of not following through. So, the next day, when you want that desert again, it's a lot easier to take it. And eventually, you stop dieting because you get tired of not being able to follow through, and the guilt is too heavy to carry.
Budgeting is a method of managing money that has been given more credit than it deserves. It's a good start, but only if you're willing to focus on increasing your earnings, set realistic targets, and stay committed to your success.
Angie M. Grainger, CPA/PFS, CFP(r), Certified Money Coach
President at RETHINK Money Coaching, Inc. Helping people master their money so they use it to transition into their NEW desired ideal life.
Visit my site http://www.49secretsofmoney.com/ and To learn more go to http://www.49secrets.com/.
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