So I built my first budget at the end of November for this month. So I’m all set right? I can just spend now right?

Not so fast. You have to fund these categories.

Why? I mean I spent some serious time putting this together. I know what I’ll make this month and what I should spend. Done and done.

What about cashflows?

I have to match my inflows with my outflows. In other words I get paid weekly, but I have bills that are paid through out the month. For instance, my mortgage payment is due the first of the month. During that week, I still need to buy groceries, parking for work, gas for my car, a credit card payment… Needless to say, for that fist week my outflows are greater than my inflows. Later in the month, it switches and my inflows are greater than my outflows.

So what do you do? Well, with each paycheck I get, I divide the money into different categories. I also list the categories as mandatory and discretionary. Mortgage, electricity, car payments are all mandatory. Clothing, vacation, are discretionary. I fund the mandatory ones first and the discretionary ones last.

For my mortgage, I might put some of my second, third, and forth paychecks of the month towards that expense. That way when I write the check, the money has been already allocated.

Why fund Categories?

1) Managing cashflow is the name of the game – The other half of cashflow is your income.

2) Easy to tweak the budget – Budgets to me are constantly evolving. Some times are inflows or outflows don’t match our perceptions. By funding the budget through out the month, you can make small changes before they become big changes.

3) Helps prioritize items on the budget – I have to fund mandatory categories first.

4) Helps keep you out of the red – Instead of not spending more than you budgeted, don’t spend more then you funded.

5) Forecast versus Actual – Lastly, a budget is a forecast. This is what the month should be. By funding the categories, you are moving from forcasting what should happen to what is happening.

I believe most people mange their expenses. Keep track of everything spent and categories it. Shouldn’t you do the same thing with your income?