Imagine if evidence-based-practice didn’t exist. Healthcare would be like a casino craps-wheel. Sure, it would be very exciting, but it would be even more terrifying. To prevent ourselves from just rolling the dice on our financial futures, we need to model our behavior after best-practices. Not common-practices or feel-good practices. Those behaviors are already exhibited by the majority of society, which carries around financial stress like it is inevitable by making bad decisions with money.
Your financial plan should be a system built for success and based on what you value the most. And, the cornerstone of every good financial plan is a Budget. Don’t worry; this won’t be nearly as painful as you think. I recommend a Priorities Budget. This approach allows you to allocate money to the most important parts of your budget first and allow spending to occur however you would like outside those parameters.
For example, if your priority is contributing an extra $1,000 towards your student loan debt payment every month, prioritize those dollars in your budget. This means that you will reduce spending in other areas of your life because they are less of a priority for the time being.
Here are the three steps to be successful with a Priorities Budget.
- Establish your Baseline.
- Identify Priorities and Set Your Goals.
- Check Back-In.
ESTABLISH YOUR BASELINE
Your baseline is a snapshot of where you are today with your finances. First, organize and consolidate all of your financial info: income, expenses, assets, and debts to better understand the scope of your financial situation.
IDENTIFY PRIORITIES AND SET YOUR GOALS
Next, identify your priorities. Below is a list of budget considerations, outside the necessities. Think about how you would prioritize this list based on your financial goals or needs. The key is that your spending/savings reflect what you have identified as a priority.
- Debt Payoff
- Family Activities / College Fund
- House Down Payment / Renovations
- Vacation / Travel
- Early Financial Independence
- Social Activities: Dining Out, etc.
- Health & Wellness
- Emergency Fund
Next, set your goals of how much money you will allocate to those areas every month. Automation is KEY! To reach your long-term goals, you need to reach your short-term goals. And budgets are built around short-term goals. If you want to save $1,000,000 in your retirement account, it starts with your next paycheck.
CHECK BACK IN
Check back in to be sure you are staying on track. For some people, that is a daily exercise, and for some, it is once a month. The key to everything in personal finance is that you are successful. Find what works for you and stick to it. Also, don’t forget to do a check-in anytime life changes significantly.
When performing a check-in, ask yourself:
- Did you reach your Savings Rate goal?
- Do you need to spend less in any area?
- Would you like to spend more in any area?
- Should you adjust any of your goals?
The most common adjustments during check-ins are to reduce spending in areas that are preventing you from reaching your most important goals. If you could use a little help tracking your spending and savings, there are many great apps and resources; Mint is a popular free budgeting app. Regardless of how you choose to manage your budget, remember: Build YOUR budget to reach YOUR goals.