A Budget Without Goals? You're Crazy!

Budgets are important. They help us to keep track of our expenses and help make sure we have enough money in our bank account. However, there is a much more important reason to have a budget - to make sure larger financial goals are achievable and realistic. If your budget doesn't align with your overall financial goals, then it doesn't make any sense to have goals in the first place. Let's look further.

What Financial Goals Should I Have?

I believe that we should be dreamers. It makes life fun and exciting. It gives us something to strive for. For those that know me well, this might come as a surprise because you know that I'm a very practical person. I don't do much without giving things a lot of thought. I analyze and reanalyze, and then analyze once more. However, at the same time I think it's great to get your head above the clouds and picture the life you want to live, and it's ok to be a little impractical. Goals ARE NOT the same as a checklist. They should stretch us a little and keep us motivated. They should inspire us, bring us happiness, and encourage us to go after something more. Let's start by taking some time to think about some goals you have in life (places you want to go, purchases you may want to make, savings you're working to build, donations you may want to give, etc). Write it down. Be bold!

What Cost Is Attached To Those Goals?

Now, since this is a finance blog, we know that those goals come with a certain cost. After you've taken some time to write out some financial goals, let's break them down a little more. Let's say, as an example, I have a goal to pay cash for a brand new car in 5 years. For the sake of easy numbers, let's say that car is going to cost $25,000. The nice thing about numbers is that we know exactly what it will take to get there - and in this case it is an average of $5,000/year without earning any interest. If we break that down further, we know it will take $417/month for 60 months to get to our wonderful goal.

So at this point, you have to ask yourself, "Can I make that happen?" If you think the answer is yes, then great, keep your goal! If not, then you'll have to adjust. Perhaps that means saving only $3,000/year for the first 3 years as your budget is tight, but then hunkering down and saving $8,000/yr for the final 2 years. If that still doesn't sound feasible, then you should look at possibly waiting 6 or 7 years to get that brand new car. If you really want that new car bad enough, you'll find a way to make it work. However, the key to achieving that goal is building in room in your budget to make that goal a reality. If you need to save $XX/month to accomplish a goal, then your budget better have that $XX/month accounted for in there.

Aligning Financial Goals With Your Budget Is Very Important

I can come up with the best goals in the world, but if I don't come up with a plan to achieve those goals, then it's simply a waste. The goal fairy isn't going to come down and accomplish my goal for me. As I said before, a goal is not a checklist (since it's something that should stretch us a little and make us strive for something), but on the other hand, a financial goal also isn't a blind wish. If you set a goal, come up with some ways to accomplish it.

If I want to retire at a certain age, then I probably should know what it will take financially to retire at that age, shouldn't I? If I want to put a down payment on a new house in 3 years, I probably should know how much that is going to be? If I want to take a trip to Europe in 2015, I may want to know roughly what it will cost to do that, right? These are all great things to set goals around, but if I don't flesh out the detail behind it, then I'm simply asking the goal fairly to drop it in my lap because I don't have a plan (and since our parents taught us that money doesn't grow on trees, we know the goal fairy can't go there to get it for us).

If I want to go to Europe bad enough and I know that I need to save $250/month to make that trip a reality, then my budget better have it written in right now so that I can start saving. If it's not in my budget, then the chance of me going to Europe in 2015 gets smaller and smaller each month I don't save for it.

Prioritize Your Financial Goals

As you're coming up with your financial goals, chances are that if you are a dreamer, somewhere along the line you'll have to prioritize and make some budget cuts (don't worry, I'm not going to make any political jokes here about our national budget).

If your financial goals say that you need to save $400/month for a new car and $250/month for Europe, but you can only find $500/month in your budget, then you'll have to decide what you're going to do? Are you going to spend less on a car? Will you take your trip to Europe in 2016 instead of 2015? Will you go to Mexico instead of Europe? These are the tweaks and adaptations you'll have to make along the way. When you lay out all your goals, you'll probably find that it's more expense to dream big than you originally thought. That's where reality sets in. But the good news is that you made a plan, and aligned you budget with your expectations. You planned ahead!

Freedom and Joy Are Worth It

The Financially Relevant site's tagline reads, "Exploring the Joy and Freedom of Living A Financially Wise Life." I purposefully came up with that line for a reason. It means that I want each and every one of you to have freedom and joy in your life. I don't want you to feel burdened by mounting debt and expenses. A financial life that is well-planned out can be a success, and it doesn't necessarily mean that you have to make more money. You just have to be smart with your money and make good financial decisions. How many professional athletes or celebrities go broke? It goes to show it's not all about the money you make, but the plan you put in place to accomplish your goals. So be bold. Make fun goals! But take time to think though those financial goals and verify that your current budget will support them! Happy dreaming!

Feel free to leave any thoughts below or contact me. 

Creating Personal Financial Statements Is Another Way To Look At Your Money

By Bob Stanke, Guest Blogger

There are so many ways to budget and manage your money, and I have tried several different methodologies over the years. I have done everything from micro-budgeting
(the process of knowing your exact daily cost of living and waking up to an exact number of discretionary funds you have for that day) to macro-budgeting
(the process of lumping several smaller line items on your budget under just a few large categories). Each method has its pros and cons, and each has different levels of detailed-ness, but being a numbers (or “data”) guy, I like how money management works.

Being a business guy, I also like reports. I like charts and graphs, and seeing how numbers change over time based on certain decisions and actions a business takes. This is why I love reading Annual Reports that companies are required to release each year (yes, I enjoy reading annual reports for fun!). You get a great detailed report of the different things a business did over the last 12 months and what the financial impact was.

After years of reading annual reports and at the same time trying to find the right method for budgeting, I decided to bring the two together. Personal budgeting and business, all in one!

So for the last couple of years, I have been creating my own personal version of the Annual Report. In the document, I spend a fair amount of time detailing what I accomplished during the last 12 months, where I made mistakes, and what major numbers impacted my life. One set of those numbers are the financial status of my life. This is where I take a different look at money I look at it in the same way a business does.

In a company’s annual report, they are required to include 4 major financial reports. They are:

● Income statement
● Cash flow statement
● Balance Sheet
● Statement of Changes in Equity

You can find the definitions to these documents using a simple Google search, and even download templates to help you get started. With a little tweaking and modification, you can create these same statements for your personal finances. I am also willing to bet that they will give you new insights as to how you are performing financially. I even recommend going the extra step and create your personal annual report. It is interesting to see your past year in a snapshot, and even more interesting to look back at past years to see how you have changed.


Find out more about Bob Stanke on his blog, found at http://bobstanke.com

Budgeting 101 - 6 Steps to a Stronger Future

Many times people say to themselves, “If I made a little more money, then I could ______.” I often catch myself in that trap of negative thinking. In fact, I think we all do at some time or another. A financial curriculum I used to teach in the past said that the first thing you should do when deciding to change your attitude towards money is to walk outside, look around the neighborhood, and yell at the top of your lungs “YOU WIN!” Who might you be yelling at? The answer is “the Joneses.”(Or insert name of your neighbor who has something you want) It is so easy to fall into the trap of looking at what others have and what you don’t, that we don’t take the time to look at our own situation and put a plan in place that works for us. It’s ok to let the Joneses win, because they aren’t the ones paying your mortgage, school loans, or grocery bill – YOU ARE. So how do we get over the hump and on our way to some better financial decision making? We begin with a budget.

Step 1: START

As you know, getting started is half the battle. For some reason, our minds need to mull things over for a while instead of taking action – and for those that know me, you know that is my natural response too. Sometimes I think the phrase “paralysis by analysis” is my life’s purpose statement. Release the activator inside of you and decide to do it. For those people that like to make lists, deciding to start allows you to check the first thing off of your list, and if checking things off of lists puts a smile on your face, you can happily to move on to step 2.

Step 2: TRACK YOUR SPENDING

We can’t decide what we want to do in the future until we know where we came from. Is $300 in groceries realistic for my budget? How much do I spend in entertainment each month? We don’t know unless we track. I would encourage you to either look back a month or two (if you keep receipts or have accurate records) or decide to take the next month or two to simply keep track of your spending. For many of us, we are certain to find some “black holes” that are soaking up a lot more money than we thought.

Step 3: DRAFT YOUR BUDGET

I use the word “draft” seriously because it’s important to realize that a budget isn’t something that is developed and finalized in a day or two and then kept in stone for years and years. It is a living document that should actively be revised and tweaked. Also, you’re not going to remember every dollar spent with a month or two of tracking. What about that auto insurance premium you might pay every six months? Or how about an anniversary or birthday present for a significant other? Those expenses that you may only pay once or twice a year still need to be accounted for and you’ll remember those over time.

Step 4: PLAN FOR THE FUTURE AND FOR THE UNEXPECTED

Life happens. Things don’t always go as we had hoped. It’s important to put some cushion into your budget for unexpected circumstances.  If you don’t have any savings built up, you can start small. Even if you are only able to squeak out $25/month to save, do it. That way you have something to draw from if your car breaks down or your energy bill gets higher than expected in the winter. If your employer offers any sort of 401k match, this has to be one of the first things you plan for. If you don’t think you can afford it, the reality is that you can’t afford NOT to. It’s free money above what you make, so it would be wise to take advantage of it. You will thank yourself later when you see how that little bit can add up over time.

Step 5: USE YOUR BUDGET TO GUIDE YOUR DECISIONS WHILE SHOPPING

The joy of the budget is that you put it together before you are out at the mall staring at a nice new pair of shoes or you’re at the electronics store checking out a new home theater system for your apartment. You made the budget when you weren’t emotionally tied to the spending decisions you’re confronted with every day. If you have the money in the budget to make the purchase, make that purchase with a smile on your face knowing you can do it. If you don’t have the money in the budget for this month and you feel it’s a “must have” – then put it into your budget for the future and make a plan of what you will need to cut to balance things out. The goal of a budget is to make a plan and have you tell your money where it is going at the beginning of the month, not let it tell you due to impulses at the register.

Step 6: PLAN FOR THE FUTURE

Do you know you’re getting a pay raise in the near future or expect some money coming your way for an upcoming birthday? Plan what happens to that money now before it is on your paycheck or bank statement staring you square in the eye. Every time my wife and I know that a raise or bonus check is coming our way, I can tell what is going to happen to it before it shows up. If we’re currently happy with where our budget is at, we make sure that all or some part of that raise is going into an automated savings plan or 401k contribution. Once again, the important thing to remember is that it’s much easier to decide what you’re spending your money on when you’re at your computer working on your budget, not when you’re at restaurant deciding if you should get another drink or get that quadruple chocolate fudge cake. It’s helpful to take the emotion out of it. All the little things really do add up, and this is one of the most important concepts to learn as you plan your financial future.