One of the keys to getting ahead financially is creating a plan for your money and sticking to it. However, this can be easier said than done. The reason that so many budgets fail is because consumers don’t create plans around their budget priorities. If your budget doesn’t reflect what really matters to you, it is less likely to succeed.
Before you create your next budget, use the following five steps to understand your priorities:
1. Figure Out What You Value
You can’t make an effect budget — which is one that you are likely to stick with — if you don’t know what you value. Your spending plan should be a reflection of what matters to you, and what goals you are working toward.
Sit down and think about what matters most to you. What are your most important goals? What do you hope to accomplish with your money? This provides you with an overall guide for your budget. You might value getting out of debt, saving for retirement, putting a down payment on a home, sending your kids to college, giving to charity, travel, or any number of things. Put your values in order of importance so you can see what you should focus on most.
2. Needs vs. Wants
Once you know your overall values, it’s time to get real about your needs and wants. Needs are things you need for survival, including food, shelter, transportation to your job, and clothing. You might also need to include bills, like insurance premiums and debt payments, in your needs.
It’s important to understand that, while food is a need, eating out at a restaurant or buying junk food isn’t the same thing. Don’t look for excuses to spend extra money by calling something a need. Be honest about what is truly a need and what is actually a want. Your budget should account for making payments on needs before spending on wants.
3. Review Your Spending
Once you understand your values and know what’s a true need, it’s time to review your past spending to see if it matches your values and needs. According to experts, most households waste 10% to 15% of their income each month. Look at your own spending. Does it help you reach your most important goals? If you want to pay off debt, but you have been out to eat seven times in the month, you can see that your spending isn’t in line with your values.
Work toward reducing how much money you spend on things that don’t matter that much to you, and putting that money toward your important goals. Your budget should help you reach your own goals, and you are more likely to stick with it when you have a plan that helps you eventually live the life you want.
4. What is Your Time Frame?
When creating a budget that reflects your priorities, you also need to consider your time frame. If you plan to retire in 30 years, but you want to help your child go to college in 10 years, that will change the way you allocate your money. You still want to be putting money aside for retirement, but you might emphasize college savings a little more. If you hope to put a down payment on a house in two years, and that’s more important than taking an amazing family vacation, it makes sense to portion more of your budget toward the down payment than the trip.
5. Tweak Your Budget Priorities
Over time, your priorities might change. As you reach some of your goals, you will need to tweak your budget to place emphasis on your next goals. If you wanted to build your emergency fund to have three months’ worth of expenses, and you reached that goal, you can divert some of the money you were using to build your emergency fund quickly toward a different priority. You can still keep building your emergency fund, but it might take longer to get to the six months’ expenses mark if you shift your focus.
You might also change your priorities as you move through life and find your values change. Every few months, evaluate your budget and review your spending. Make sure your money is helping you accomplish your goals.