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, this article discusses this issue in business: https://timberry.bplans.com/planning-vs-accounting-2-different-dimensions-and-why-you-care/. Today, almost all the “home finance” solutions available are essentially accounting solutions, with some planning added, focusing on what you have done first and what you want to do second. The point here is, first you need to have a plan then you can account for how well you followed it and see where you can improve.
In life we naturally follow this process:
When we want to go on trip we do a trip plan; where will we stay, how long will we stay, how will we get there, how much will it cost, etc.
When we have a nice dish at a friends house and we want to make that at home we ask for the recipe; what are the ingredients, how do you mix them and cook them and at what temperature,etc.
When we take our car to be repaired the repair man makes a repair plan; what will be done, what parts are needed, what skills are needed, when can we have it done and what will it cost, etc.
When we build a house it starts with; a blueprint, material plan, location and cost, etc.
How is it that in normal life we understand that planning comes first but, when it comes to managing our finances we don’t?
Just to make sure you understand the difference, Planning looks forward into the future and Accounting looks from today backward into the past. Planning and accounting are two different dimensions. Planning follows an inductive thought process that is driven to understand how things fit together in the big picture and Accounting follows a deductive thought process that is driven to understand what happened at a greater and greater level of detail.
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 Spending Plan/Budget, and the Spending Plan 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 each week you can look to 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 analyze your monthly results the last week of the month.
This puts planning and accounting into a continuous process that is ideal for supporting the activity of managing finances!