simplehomefinances

SHF BLOG

Tips and Tricks for managing your finances!

Planning vs Accounting

Home finances is about managing money to meet obligations and achieve goals. One of the most common errors in business finances is confusing planning with accounting, this is also true in home finances. Today, almost all the “home finance” solutions available are accounting solutions, even though accounting solutions focus on what you have done and not on what you want to do.

Accounting looks from today backward into the past. Planning looks forward into the future. Accounting and planning are two different dimensions. Accounting follows a deductive thought process that is driven to understand what happened at a greater and greater level of granularity. Planning follows an inductive thought process that is driven to understand how things fit together in the big picture.

To gain control of your finances you need a plan, and everything needs to fit into that plan: your income, your expenses, your goals. This plan is typically what we call a budget, and the budget is your best tool for getting control of your finances and your future. So how does accounting work with planning? They fit together in an overall process called Plan – Do – Review. First you must have a plan then you follow your plan, pay your bills, and fund your goals, then adjust for the unexpected. Then at the end of the month you can look backwards for accounting to show you where things went wrong. We believe that you should plan your finances at the beginning of every month, pay your bills and adjust your plan each week, then look back to analyze your results at the end of the month.