Saturday, March 3, 2012

Reactive, Active, Proactive Finances

According to statistics, about 70% of working Americans live paycheck to paycheck.

That means that over two thirds of us are one paycheck away from financial instability. I fully realize that this is beyond the control of many, who are simply surviving these hard economic times.

But for many others it is a choice, failing to do the work that is required to establish and maintain good financial practices. I see this as a spiritual issue as well as a practical one. We limit our life choices when our finances are in disarray. We feel destabilized and anxious, and so do the people that depend on us.

I see three possible ways to handle a budget (spending plan): reactive, active, and proactive.

The reactive budget is one based on figuring out where you’ve been, rather than where you are going. It is like planning your day after it has already happened. At the end of the month you add up everything and hope that you haven’t overspent. I suppose this works if you have gobs of money in reserve or always have a surplus at the end of the month. But it is not a financial plan.

The second possibility is the one that we are most familiar with in concept. It is making a plan and sticking to it during the month so that we end up in an expected place. This plan works particularly well when we have a relatively dependable income. The truth is that we only make choices on about 20% of our income. Most of our finances are already committed to fixed expenses like food, rent/mortgage, utilities, etc. Yes, there is flexibility even within these categories, but usually not a whole lot. It is often this last 20% that couples fight over.

What does a proactive budget look like? I only spend the money in April that I earned in March. I always operate a month ahead. At the end of the month, I allocate money based on what I have already earned. In other words, I don’t spend money that I don’t already have in my account. This is particularly wise for those who have fluctuating income. I see this method, along with maintaining an emergency fund and building  savings and retirement accounts as being the most sound.

Items that don’t make it into a regular budget are often the ones that sink us: gifts for Christmas, birthdays, weddings and showers, regular car maintenance items like tires and brakes, licenses, taxes that must be paid, and co-pays on doctor visits or medications. All those must be included in a monthly budget.

I use a software program to maintain our budget (Quicken).

For a software program using a proactive model check out:

There are many others as well. Do you use a software or other program? Which one and how is it working for you?

For great financial resources see Dave Ramsey’s website:

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