Accomplishing Goals By Creating a Painless Budget You Can Stick To

Accomplishing Goals By Creating a Painless Budget You Can Stick To

Accomplishing Goals By Creating a Painless Budget You Can Stick To

Understanding What a Budget Is

When the word “budget” is mentioned, usually people run the other way. Shivers are sent down spines at the thought of complicated spreadsheets and formulas. Nobody enjoys the constraints and too often a budget created is rarely followed. Consequently, a broken budget causes guilt and remorse at the end of the month when it’s realized.

At its core, budgeting requires calculating estimated expenses and income over a set time frame, which are evaluated periodically to make adjustments and ensure accuracy. Budgeting is a fundamental building block to successful financial planning. It’s near impossible to make rational financial decisions without understanding where money is going. In practice, those without a budget typically find themselves losing money to the dark abyss of spending!

A Different Way to Budget

Budgeting has a different purpose for different people but it’s not just for those who find themselves in a hole each month. Typically, people who need budgets the most are those who don’t think they do. Those with healthy cash flow which creates a surplus each month never feel the need to create a budget. This nonchalant attitude towards money and expenses leads to ‘lifestyle creep’ (as Anthony Saffer explains).

Before starting a budget, ask yourself a simple question: Does my money have a specific purpose? Too often I see people make a budget, then use whatever is leftover (if there is any) towards their goals. In turn, goals fall short and are rarely accomplished because at the end of the month, the money “just isn’t there.” Unless money is given a specific purpose, it will be spent on increasing standards of living, typically outpacing what is earned each month. Mitch Anthony states the money you earn can fall into four main buckets. With money you can: Owe it, Grow it, Give it, or Live on it.

Using Goal Based Budgeting in Practice

What makes budgeting simple is you’re dealing with one hundred percent. The money you receive will be one hundred percent allocated to the four different buckets, whether it’s spent or saved. Understanding this relationship will make your budget easier to build as you simply drop expenses into each bucket.

Owe it

Within this bucket are two categories: debt and taxes. Debt includes things like your mortgage, car payments, student loans, etc. The smaller this bucket is the better and the goal should be to shrink debt and taxes over time.

Grow it

Next add up whatever amounts you currently save each month, such as savings into a 401k or other retirement plan or money you tuck away into an emergency fund.

Give it

For many people, this will actually be where they start their budget. Add your giving, tithing, or charitable contributions into this bucket. This is also a great way to track your total giving year after year.

Live on it

Once you have calculated amounts for each of the previous buckets: Owe it, Grow it, Give it, the rest is living expenses. This is money you spend on food, entertainment, clothing, or any other items you purchase to live your current lifestyle. You may be surprised to see how much is actually spent on non-essentials, but the important point is that you are in control of what is spent here.

Reaching Goals

Now that a clear picture has been created of where your money is going, determine which bucket could be cut back to achieve your goal. The “Live on it” bucket is typically the largest and contains all your non-essentials. Try reducing living expenses by cutting back the excess in your life. You will be surprised at how much you really don’t need. However, changing your lifestyle can be a painful process especially if you’ve become accustomed to a certain standard of living. Start with small things such as bringing your lunch to work instead of eating out. Not all entertainment needs to be expensive either. You can limit the amount you spend on leisure by finding free activities such as the beach, museums, or parks during the weekends. You may even find these types of activities keep you active and healthier. These small changes in habit add up over time to create a big impact. Budgets don’t have to be complicated spreadsheets with dozens of categories, they just need to keep you on track to assist in accomplishing your goals.

Talk with us about your portfolio or financial plan here: Talk with an advisor

More Reading: Do You Desire for Your Children to Be Generous?

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