Why Setting Financial Goals Goes Further than Creating a Budget
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It’s long been stressed that creating a budget is the cornerstone of personal finance and the key to climbing out of debt. While I do think that having an idea of the amount of money you do spend (or can spend) each month in a certain category is important — and thus why signing up for a program like Mint.com is such a good idea — I don’t think a budget is necessarily the best route to take.
What do I mean? Well for me, if it’s nearing the end of a month — like it is right now — and I were to look at my budget and noticed that I was say… $40 under the amount I had allowed myself to spend on going out to eat for the month, I would be very tempted to go out for a big dinner that week and blow $40 because I had told myself I could and would still be financially okay.
While I might have been “okay” spending that $40, the reality is that I wouldn’t be doing myself any good. That is $40 I could have saved instead to put towards paying off debt, or a bigger ticket item I was saving up for. So instead of budgeting and then spending up to that budget each month, I have found it much more practical to set financial goals for myself.
For instance, I have about $3,000 in credit card debt built up, mostly due to the expenses which racked up during my move to a new apartment after college, buying a new car, and building a work-appropriate wardrobe. While I know what I make each month — and thus what I can afford to spend each month — and could budget out that allowance per category of expenses, if I had been $10 under my shopping budget yesterday when I went to Best Buy to ogle over flat screen T.V.s, I would have bought the copy of Wedding Crashers
However, I wasn’t $10 under my “shopping budget” because I don’t have a shopping budget. Instead, I know that I want to have my credit card debt paid down far enough by this summer that it could shoulder the weight of a new computer — since mine is slowly on its way out — and paid off completely by the end of the year. So I put the DVD back, saved the $10 and put it towards larger dreams. I wouldn’t have done this with a budget.
These are goals I’ve set for myself and ones I’m likely to try and stick to; goals that I am more likely to achieve, ten dollars at a time, without a budget than with.
(image via personal-financial-plan.com)
Technorati Tags: personal finance, budget, goals, debt, college, graduation, Real World
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Hmmm, I’m not sure I completely agree. You can setup your budget to still give you freedom to have some spending/eating out/whatever you desire money. I see it as the best of both worlds.
If you look at your budget and see you have $40 leftover, why not just hold onto it and then next month you’ll have $80? You could then spend that however you like, etc.
Don’t get me wrong — I think paying down that debt is very, very important. But I also believe in enjoying life on the way, too. (I recently wrote about this but don’t want to link spam your blog
I agree that having some fun along the way is essential - I think without it any financial plan (budget or otherwise) is doomed to failure.
And if you can manage to save the $40 so you have $0 left over the next month than by all means (which is really what I was advocating; saving rather than spending the left over $40).
All I was trying to get at was that I personally have the tendency to look at a budget and, if I see that I’m $40 under, spend UP to my budget, rather than saving (which I’m better at if I have a goal instead).
Next time, don’t hesitate to post the link; sharing content is what makes the blogosphere fun!
I think the most effective strategy is to have both GOALS and a … I can’t say the b word … CASH FLOW PLAN.
I mean, a cash flow plan is boring if there’s no greater purpose to it.
But with goals and direction, it’s (dare I say) exciting.