In the modern financial world we live in, with inflation, tariffs, the financialization of burritos (Looking at you, Klarna), etc., a concern I hear a lot is about budgeting. Budgeting can be great, and is certainly a great first step. That being said, here are my main issues with budgeting and why having a cash flow system is the superior way to accomplish your goals and get the most out of your money, whatever that may be for you:
Life does not work in a straight line.
As a father to three young children, I can tell you from experience that monthly expenses are never what you budget for. Yes, some months you are under budget and some months you are over budget, but life is unpredictable, and expenses don't ask about your budget.
A cash flow system is built knowing that we live in an uncertain world, putting in place the proper guardrails and having margin for error built in.
Budgeting is limiting
Budgeting sets an unnecessary upward limit on your savings. If you plan to save X dollars and you hit that goal for the month, it feels great, but what if you wasted money accidentally, and it could have been more? This is something to do with human behavior. If we have to opt in to saving money each time we have an increase in cash flow, we are very unlikely to do so. The same is also true if we simply reverse this to an opt-out system.
A cash flow system helps you save by default. It is not a magic trick that increases your income and decreases your living expenses. It is much more simple and powerful than that. It automatically catches increases in cash flow from sources like the ones below:
- Raises
- Tax Refunds
- Higher paychecks after maxing a 401(k) or going over the social security wage base
- Paying off a debt
- Many more!
Human Behavior
There is an art and a science element to being good with money. Budgeting takes a "science only" approach while ignoring the human behavior element of spending. A cash flow system is built to work with real human beings and help them overcome our propensity to spend on things that don't measurably make our lives any better. We consciously save money, and unconsciously spend.
A recent example of this in action was during a review meeting with a client, where we learned that they received around a 20% raise through a promotion. If left to our own devices, often purchases start to be made before the first paycheck has even arrived. With a cash flow system in place, we got to have the fun conversation of convincing the client to spend half of the raise rather than fighting against the tide. Art and science.
Conclusion
We live in a world where we are not only dealing with inflation, but planned obsolescence of the things we buy, and technology that we "have to" buy to function in society. For example, where does buying a $1,000 smartphone every few years factor into inflation calculations? Here is a hint: It doesn't. We help our clients implement cash flow systems to control what we can control and flip the script to become conscious spenders and unconscious savers.