This is the digital age. The transaction on money – savings, investment, shopping, payments, loans and salaries are all now happening via electronic medium. This has also led to consolidation of information, which was once dis-aggregated and difficult to track. Now we would be able to track ALL of our transactions that we have made during the past several years via a click of the button. The transaction trail can give insights into what we earned, spent, shopped for how much or invested how much and when. Better still, we have live information via apps about how much is the bank balance, investment account balance, spending limits, credit limits and due dates of all payments via smart apps that enable us to track the universe of our financial footprint via single or multiple digital interfaces.
As a result, most of the analytics and information dashboards; if used to the full potential may become a boon to get personal finances in shape and help become financially secure. Alas, this information overload has also worked against the individual since dealing with so much information on a day to day basis and working to keep it consolidated and makes sense of it most of the times takes a toll on the individual mentally. Above, all it requires a lot of discipline on the part of the individual to stick to the plan that was formulated despite making or knowing it through smart apps.
Though these smart apps allow for functions such as budgeting and planning via different tools, in practice it never materializes due to lack of discipline and inability to stick to the same due to impulses / over information on account balances or simply easy credit facilities availed.
Spending curbs and budgeting
The need for today, whether for individuals or families is to keep spending under check and not to shoot the budget that was planned (if at all) for the year. Getting a budget at the beginning of the year for spending on essentials and discretionary items is doing the basics right. Now while all the smart apps might make it easy to roll out a yearly budget, sticking to it while juggling between apps, account, keeping a track and above all having the discipline to not use / ignore the alarms might make the most efficient budget planning exercise seem useless.
Doing it the 20th Century style
20 or 30 years ago, family budgets were done yearly with monthly spending planned during the month, usually at the beginning of the month. This was done by allocating the planned expenditure for the month and all expenses anticipated (essential and / or discretionary) and allocation done before. There used to be a small buffer for unforeseen over budget items during that month, but this could be by a small percent of that period budget. If the spending for that month exhausted the limit, then there was no further spending on that line item or that spending could be rolled over to the following month.
So visualize a typical household budget on a monthly basis with – Food/groceries, staff payments, medical, school payments, travel & transport, communication and many such as being essentials and followed by a list of discretionary spending such as dining & entertainment, short vacations, weddings/parties, shopping nick-knacks etc.
Now imagine there are monthly / annual spending limits on each of these items. The essentials would normally take a uniform run-rate for the entire period however, the discretionary items are the ones that need the regulation / budget on a monthly / annual period.
The traditional way to do this would be to allocate an envelope to each of the expenditure at the start of the month and spend only that which is allocated to that expenditure item. If the envelop goes dry before the end of the month then no further spending occurs and if the there is balance in that then it goes into the emergency envelope that is not to be touched come what may except for emergency.
This method was practiced widely and still is done by many families but due to rapid digitization and quick payment systems, this method is less prevalent. This method might be useful for individuals / families that are struggling with issues of discipline or ones that need to get habituated to such form of spending. It is very rewarding method that helps keeps budgets in control and provide for the ability to get all your spending needs address, however big or small.
If you have not tried this yet or have heard of this right now, it might be time to start on with this without further delay at least for 1 yearly budgeting cycle.