One of my favorite times of year is when Mr. Moneyaire and I get together to goal set and create our budget that we track against for our upcoming year. It gives me an opportunity to do the big picture thinking I enjoy. Mr. Moneyaire could probably do without the goal setting portion, whereas I opt out for the tracking portion. Setting goals is key to a successful budgeting process, especially when you’re first getting started.
Over time, your goals will help you build the desired lifestyle you want. Budgets aren’t about restricting yourself or your family – it’s about identifying the things that are important and the ones that are not, then planning on how to go about achieving them. We all (unless you’re Jeff Bezos) have finite money, and making smart decisions about where to spend that money is critical to getting what we want out of life and not feeling like we’re missing out.
Budgeting sometimes falls out of favor with people because it seems like a punishment. It just feels like you’re just having to give up a bunch of things and deprive yourself. Kind of like when you put yourself on a super low calorie diet to drop weight. It feels like you’re stripping away all the satisfaction and you’re always hungry.
What I’ve found is that when I diet this way, I’ll “reward” myself:
I went two days without having a cookie! As a reward I’ll have one today.
It’s been a week with no drinks. It’s Saturday night, I can have a few cocktails.
Well, I was really good all week, I think I deserve a creamy pasta dish.
Crash diets fail; your crash budget will too.
Just as crash diets never achieve lasting results, a crash budget won’t either. If you’re stripping out all the joy in your life, budgeting will be a short lived exercise. And that’s okay, if at the end of your crash budgeting adventure you reach your goal, and don’t want to do anything further. Perhaps, after your crash budget you save up enough to buy a special pair of jeans or pay off an annoying credit card debt. That’s fine, you achieved your goal and if you want to be done, be done.
Long term budgeting isn’t for everyone. It takes effort. It can feel tedious. Aaaand, if you stick with it, over time, you’ll see big results and it’ll become part of your lifestyle. Budgeting is a way of life for us because we have limited money coming in and we have to earmark those dollars to particular jobs so we can live the life we want.
You can have anything you want, just not everything
Paula Pant sums it up really well, “You can afford anything but not everything.” What she means is you can have your cake and eat it, too. However, in order to eat that cake, skip the creamy pasta dish and get the chicken and vegetables instead. You can have something rich in life (the cake) but you can’t have everything and be rich (creamy pasta dish AND cake AND your money). Why? Because, otherwise, you’re going to end up super happy in the moment but sick (money anxiety) and overweight (in debt) later.
What helps is to develop goals and build in spending that brings you joy. During our Era of Austerity we were on a really restrictive budget as we built up our emergency fund/investments. However, we built in things to look forward to. An example was our first big trip together, to California, where we drove up the 1 from Orange County to Napa. The thing that made cutting back on our spending manageable was the light at the end of the tunnel; our goals. They were the whole point of us making and sticking to a budget. Eventually, our goals shaped the lifestyle we enjoy today. Which include travel, spending time with the people we love, enjoying cultural and sporting events – and good food.
What Should My Goals Be?
Goals are completely dependent on an individual, couple or family. There are no right or wrong goals, so long as they’re agreed upon and bring a sense of hope and excitement. If expensive bags are your thing, that’s cool. Travel is your thing? Great! Exploring trendy restaurants is what you want to pursue? Wonderful! Building up a sizeable emergency fund? Amazing! There’s no judgement here. Money is made to make your life better. Otherwise, what is the point?
Things change; so should your goals
Your goals can change and evolve over time. Sometimes you reach a goal and it’s a check mark on your life to do list. I had a goal of earning my MBA. A lot of effort went into that and it consumed a lot of my time and money. My company offered a tuition reimbursement plan and I made sure I understood the plan and how I could benefit from it the most. I applied for scholarships. We saved to pay for as many classes a year out of pocket as we could. As soon as I earned my diploma, we focused on how to pay off the loans I incurred, which included using said diploma to get higher paying jobs.
As a couple we had goals to travel outside the country at least once a year. Mr. Moneyaire created a goal to see all the world wonders. We’ve seen 5 of them together. Now with Baby Moneyaire we’re modifying our travel goals until she’s older. Traveling internationally to see world wonders is a bit out of reach with a baby, for us. Instead, we’re sticking to domestic locales and focusing on visiting family and friends. We’re prioritizing travel where each of us gets a “break” from parenthood. Mr. Moneyaire takes off to Vegas with his friends and I’m looking forward to my first solo trip on a cruise ship to the Caribbean.
Putting a price tag on your goals
Goals don’t magically just happen. Goals come at the cost of other things. If you have a goal to put away $5,000 towards an emergency fund, well, that means you’re not going to be spending that money somewhere else. All goals have a price tag. We have some expensive goals. We have limited income. How do we do it?
First, we figure out how much money we’re bringing in minus what our monthly expenses are. Don’t get discouraged if your current expenses take up most of what you bring in. You can control your expenses. As you set goals for yourself what will reveal itself are your values. If you’re setting a whole bunch of goals around travel but your large higher-end rental in a trendy part of town is eating up most of your income, well you may need to change that so you can live your best life traveling. Maybe your car payment eats up too much of your income, or maybe it’s eating out. You may have to take a hard look at these categories.
Perhaps, instead of any of that you’ll set about figuring out how to increase your income. But more on this in a separate post. First, figure out what you’re bringing in and then what it costs you to live every month. Whatever is left after this math exercise is your discretionary income. What you do with that money will vary depending on the goals you set for yourself.
Price it out
Next, figure out about how much your goals’ price tags are. For example, if you want to save up to buy a new car (or a new-to-you car) look up how much the car you want typically goes for. If the car you want costs $15k, well then that’s the goal – to save $15k. For something a little less concrete, like building up an emergency fund, look back at your prior month’s expenses. Go back 6 months. Take the average of those months and then multiply by the number of months’ worth of emergency fund you’d like. If on average you spend $4k a month and want a 6 month emergency fund, that means the goal for the emergency fund is $24k.
Set a deadline
It’s great to have a goal and an idea of how much it’ll cost you, but without putting a time frame around it, there’s the danger it may never happen. Putting away $24k for an emergency fund can feel overwhelming. Its easy to write off a goal when it feels intimidating. Take that big goal and break it down. You don’t need to come up with it all at once, or even in a year or two.
If you have a goal to get to a $24k emergency fund in 5 years, that means putting away $400 a month. Does that feel too daunting? Give yourself an extra year. If it feels like you could shave off a year, do it. Take those big money goals and break them down into mini monthly or weekly goals. Celebrate those small wins; they’re adding up to something big.
One of two things will happen when you figure out how much discretionary/variable income you have, how much your goals cost and how much time you have. Either you’ll realize you have plenty of money to achieve your goals in the time you give yourself. Or you’re going to realize you’re going to have to cut from other places to afford to achieve your goals. Now that you have an idea of how much your goals cost and how much you have left after living life to put towards them, it’s time to go about creating a plan to help you reach your goals. You may need to cut back on some spending or give yourself more time to reach your goals.
Identifying your goals and what’s important to you will help you with planning on hitting those goals. Once you identify your goals, its time to set up a plan on how to direct dollars to that goal and the time you want it to take to hit them.
The point of goal setting is to become intentional with how you are putting your money to work. The first few steps to become more intentional is to see first how much you’re bringing in, where it’s going and how well that aligns with the goals you have.
Trim the fat
Some of the more obvious variable categories may be food, clothing or subscriptions you have like a gym membership or Netflix. Some other not so obvious variable costs could be your car or home insurance. Typically, for these you’re not locked into having to pay for them – you can modify or outright cancel them at will. Now, you can’t cancel eating, you need to do that to survive. It’s not advisable to cancel home or car insurance altogether but getting quotes from competitors or bundling your insurance needs could save you lots of money.
You can change your social paradigm to perhaps have people over and get take out (allowing yourself the pleasure of not having to cook, try food at a new eatery and avoid tipping and expensive beverage costs). Consider not buying new clothes for a while or get second hand ones. You can change your membership to a lower cost gym or cancel it outright. Cancel Netflix. Maybe switch banks and go to a lower fee institution. You get my point.
Don’t cut out all the flavor!
I’m not encouraging you to do all of these things. But don’t cut all the joy out of your life. When you draw up your goals, you’re going to realize every goal comes with a price tag and timeline. Most things in life have a cost associated to them. The job will be to prioritize spending for some things over others. It might seem odd to think of saving money towards something as a cost. When you save money towards a goal, consider it money unavailable for other purposes.
Some goals, well, you may look at the price tag and decide the goal isn’t worth the price you’d have to pay. You’ll see what’s important to you and cut the extraneous. When we drew up our goals early in our marriage, travel, education and financial security were our goals. We cut spending in all our categories outside of these. Our cable package was basic, and we skipped subscriptions like Netflix. We lived in a small condominium. We drastically cut our clothing budget and made plans to go down to one car. Not even our gym membership was safe. We switched our membership from an expensive luxury gym to the one our town’s park district provided that was within walking distance. Our early goals and intentional saving led the way to our lifestyle.
A grand plan
Looking back at how we started it seems very lucky. We didn’t have a grand plan – we just started with goals of things we wanted to do or feel. We wanted to be happy and feel safe. No one had ever really told us how to budget, goal set and plan our financial lives.
As we started to prioritize what we wanted, we realized that spending money towards things that weren’t a priority felt wasteful to us. And it was. It’s not a waste to buy designer jeans if fashion is a priority to you. It IS a waste, however, if you don’t care about expensive jeans but spend money on those instead of on what you really would rather have.
Make your goals specific. It’s not enough to say you want to “save more.” What’s that mean? What goal is it that you are saving towards? How much are you hoping to save? By when? Make your goal a category in your tracking sheet. Dedicate a number every week or month to it. Be intentional with how much you dedicate towards that goal. Do the math to see if you’ll be able to hit that goal in the time you’ve given yourself.
When we had Baby Moneyaire, I wanted to make sure that we were saving “enough” for her education. I had to figure out what “enough” meant and how to hit that goal. I ran a calculator that would estimate how much higher education would cost when Baby Moneyaire was ready for college. Turns out she may need anywhere from $250k to $400k to attend university or college. It’s not likely that we can save that entire amount even though we have well over a decade and a half. We decided that $125k would be a reasonable amount for us to strive towards given how much time we have. At the lower end of the range, we’d at least cover half of her costs. We’re comfortable with that; she should have some responsibility towards higher education costs.
Work backwards to get ahead
Since we had that end goal in mind, we worked backwards with how much time we had to figure out how much to put away every month. We got creative and asked family and friends to contribute to her plan in lieu of physical gifts. Luckily, we have generous family and friends who chose to contribute to a 529 plan we had set up for Baby Moneyaire. With their contributions and our own lump sum contribution we kick started the plan. After that we contribute $250 a month towards her plan. Assuming a 7% return we’ll hopefully hit that goal for Baby Moneyaire when she is ready for college. Having a target, a timeline and plan is key to achieving our goal.
Of course we would love to exceed our goal and cover more of her higher education expenses. However, without developing something to strive towards first, we would not know what to aim for.
A Price Tag for Your Goals
By being intentional with your money, setting goals and timelines, you can have your cake and eat it too. Intentionally spending your time and money will get you the life you want.
What are some of the goals you have for yourself and what’s the plan to get to them? Leave a comment below to let us know.