Before we proceed, let’s get one thing straight. Retro-active budgeting is NOT budgeting.

I used to think I knew what budgeting was. I used to think budgeting was a ballpark guess of how much I was spending each month on different things. I thought budgeting meant setting a goal in my head of how much I wanted to spend on something (for example, groceries), and then seeing how much I actually spent at the end of the month. Then with a shrug of the shoulders, I would whisper to myself, “Better luck next month”.

This is not budgeting! There is absolutely no control in this method.

Some people do something similar and I refer to it as retroactive budgeting. At the end of every month, they look at their spending and try to compensate for any categories that they overspent in. Unfortunately, sometimes the overspending spans all categories. With retroactive budgeting, there is no way to ensure that your spending is less than your income. It may be that you reach the end of the month only to regret spending your money on dining out the other night.

What we want to practice is proactive budgeting. We need to make decisions on whether or not to purchase things based on our budget BEFORE we actually buy them. In order to be really good at proactive budgeting, we need to discuss the ENVELOPE SYSTEM.