If you're looking to get a better handle on your finances, you might wonder whether budgeting or forecasting is the right approach.

While budgeting can help you control your spending, it has some limitations when it comes to planning for the future.

Forecasting, however, allows you to project your income, expenses, and other financial goals into the future, giving you a better understanding of how your finances will look in the coming months and years.

Here are the differences between budgeting and forecasting:

Some methodologies look at future expenses and goals. | Project all your future cash flows: income, expenses, investment, savings… and look at the results: balance and monthly cash flows. | | Complexity | Easy to create a first budget. Hard to create the right one, especially when you have financial goals. | Initial learning curve required. Then easier to directly understand how spending behaviours affect your future | | Input data | Past transactions | Past transactions, current cash balance, financial goals, credit cards, BNPL, planned transactions | | Create the right plan | Easy for people with constant income and expenses who aim to save money.

Not designed to be a decision-making tool. | Helps with any financial decision by creating a scenario and visualising the outcome | | Mindset | Reactive. Usually tries to limit expenses and react after something unexpected happens.

Budgeting promotes discipline and keeping things in order. | Proactive. Plan ahead to avoid being caught off guard.

Forecasting promotes actively | | Future cash-flow analysis | Only current month | Shows if you’re going to be cash-flow positive or negative. Show how much of your future cash flows can be allocated to your goals, | | Financial Planning | Only focused on the current month. Doesn’t show if financial goals are realistic and when they can be completed. | Shows if you’re going to be cash-flow positive or negative so you can allocate your future cash-flows can to your goals.

| | Decision making | Helps to decide the budget at the start of the month. | Designed to be a decision-making method. The idea is to create a forecasting scenario to look how a decision will affect the future, then decide to go ahead or not. | | Cash balance | Doesn’t tell if you will have enough money the day expenses are due | Shows precisely if you have the right amount of money, in the right account | | Timeframe / Visibility | Backward-looking. Uses past expenses to budget the current month. Past transactions, current balance.

No visibility on the future balance. | Forward-looking. From 1-month horizon to mid-term (5y), based on future income, and expenses.

Upcoming balance and monthly cash-flows | | Credit cards / BNPL | Doesn’t show the future-cash flow impact of loading transactions on a credit card | Shows the future cash-flow implications of transactions on a credit card and which months will become cash-flow negative | | Available tools | Budgeting software, spreadsheets, banking apps, budgeting apps | Spreadsheets, Nova Money |