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!
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