Creating a budget is one of the best ways to get on top of your financial situation. With a budget, you can plan where your money is going — ahead of time.
Using the right spending plan can ensure that you take care of your needs, and even that some of your wants are covered.
The challenge is in creating a budget that you’ll stick to and that makes sense for your finances. Before you begin creating a budget, take some time to get to know yourself and your values.
What Really Matters to You?
Have you tried to make a budget in the past? After a few weeks, you’re probably done with it. A lot of the time, that’s because you divide up your budget according to categories you think you’re “supposed” to have.
You cover your bills and then divvy the rest up equally amongst other categories. After a while, you find yourself “borrowing” from one category to fund another. Or maybe an emergency comes up and destroys your budgetary efforts.
The problem is that most of us aren’t creating a budget from a place of values. Figure out your values and priorities, and then create a budget around those items.
When I first started this approach to spending, my priority list looked like this:
- Pay down debt
- Save for emergencies
- Save for retirement
- Activities for my son
Those were my priorities. I built my budget around making sure those items were taken care of first. If I ran out of money before getting to the “entertainment” portion of the budget, then that got left off.
Today, now that I am in a better financial situation, my priority list looks more like this:
- Necessities (housing, utilities, insurance, etc.)
- Shore up emergency fund
- My son (college savings and activities)
- Other entertainment (dining out, movies, etc.)
My values revolve around planning for the future and helping others. Plus, I like to travel. I can look at that list and direct my financial resources in a way that helps me reach my short-term and long-term goals.
Your values and priorities might be different — and they might change as your financial situation gets better over time.
Reduce Your Impulse Purchases
One of the great things about creating a budget around your values and priorities is that you can reduce the urge to spend impulsively. When you take the time to figure out your values, it’s easier to say “no” to something that doesn’t fit your spending profile.
There are plenty of times that I take a look at something I want and then decide to put it back because it doesn’t fit with my values. When you know what you are working toward in the long-term (and even the short-term), it’s easier to stay on track. I know that buying an expensive blender that might only be used once a year is going to mean one less night on a vacation.
I know that buying an expensive blender that might only be used once a year is going to mean one less night on a vacation. That’s unacceptable to me.
Creating a budget around your values forces you to get to the nitty-gritty of what matters to you. Once you are aware of that, you can curb your impulse spending — and it won’t even feel like a sacrifice because you know something better is coming later.
Creating a Budget that Works
A values-based budget doesn’t have to mean you account for every single penny all the time. Counting every dollar is a good approach if you have a lot of debt you trying to pay off, but it doesn’t make sense as you get your finances under control.
I use broad categories that reflect my values. I know that I’ll spend roughly $1,500 a month on my housing, utilities, and insurance costs. Other than that, I max out my Roth IRA each year, and set aside money for my son’s college and extracurricular activities. I put money in a travel fund. What’s left after my priorities are taken care of can be used flexibly.
As long as you are good about tracking your spending so you don’t go overboard, this method of budgeting can work really well.
Get to know yourself and what matters to you. You’ll be far more likely to stick to a budget, and you’ll probably be happier with the budget as well.