The one thing missing in every budgeting application is the “Spending Commitment”.
Definition: “A thing I am already committed to paying for”
This concept a fundamental part of any budgeting system. Why?
Let’s back up. Why does one create a budget in the first place? I have thought hard to distill a clear answer for this. Here it is.
A good budget must answer:
- Is my lifestyle sustainable?
- Should I buy this thing in front of me right now?
To answer the first question, I absolutely need to know how much money I’ve already committed to spending. These are all those repeating payments I have. This total will tell me if my lifestyle is sustainable. If it is not, I will need to make dramatic changes like move, get a cheaper car, or add a side job.
To answer the second question, I need need to know how much cash is not already committed. To get this number, I take my income and subtract the committed spending. This is my “free cash”. Can I buy this thing in front of me right now? If I have the free cash to spend, yes, otherwise no.
In so many budgeting apps, this information is not prominently displayed.
Take the classic bar chart of how much I’ve spent each month. This was my go-to chart in Mint for years. Since my committed and free spending are not separated, even if I was the most frugal I’ve ever been during one month, a single large yearly expense would make it appear that I overspent. The data is polluted. I would need to make an extra effort to see if I actually overspent or not. Maybe you’ve felt this pain too. We need to clearly separate the things we can control month-to-month (free spending) from the things we can’t (committed spending).
A chart that only shows me how much free cash I’ve spent each month would be so much more helpful. It would compare apples to apples. If the bar is high one month, it actually meant that I went crazy with the credit card.
This separation of committed spending and free spending is so helpful for understanding your personal finances, I’m surprised it’s not built in to most budgeting apps.
It’s built in to Tend, though.