Setting financial priorities and creating a budget isn’t good enough. You have to be setting realistic financial goals and a budget you can keep.
Budgets are like diets. We all know that we need to follow one and we all try from time to time. Unfortunately, we’re about as successful at our budgeting as we are on our diets. Why? Because we set unrealistic financial goals and don’t build the support we need to succeed.
The National Foundation of Credit Counseling found more than 60% of Americans admit to not having a budget. “Budgeting is a basic building block to personal finances,” Gail Cunningham of NFCC tells Fox Business, “but too many people think ‘budget' is a four-letter word.”
There are two problems that keep most people from being able to keep a budget. I know because these two problems wrecked my financial life for years before I figured out what was going on.
- People start a budget without really understanding WHY. They save but they don’t have a clear vision for their financial priorities. Without these goals and a strong commitment to reach them, no budget can last very long.
- People set unrealistic goals and budgets that are impossible to keep. They shoot for the stars, saving every penny and get burned out before they ever make any progress.
I’m going to share with you one of my first money mistakes and how I turned it around to create a budget I could keep. After learning how to set my financial priorities and create a workable budget, it felt like the world of financial freedom opened up and I could tackle all kinds of topics like investing and managing debt.
Why Setting Financial Priorities is Important
A lot of people don't know how to set their financial priorities. They either spend money on everything that they want without putting too much thought into what is really important or they force themselves to save as much as possible and never get a chance to enjoy life. Financial planning goes beyond setting your savings goals, though. Many times, the people who run out of money are those who have no idea where it all went because there were only a few things they considered and cared most about.
The key with making a budget isn't having one goal that you work towards until you reach it. This would be considered a “short term goal by most finance professionals since you can't have any significant growth when you are limited to a specific amount. Financial planning requires you to create both short term and long term goals so that you can add in some flexibility for yourself when setting your budget up.
Here are some examples of good financial priorities:
• Saving money (long-term savings goal)
• Paying off student loans (long-term goal, but with a set date of completion)
• Vacations (short-term goal with no deadline)
Some people might not agree on what the most important aspects of life should be for everyone; however, anyone can say that paying off debt, saving money, and planning for retirement aren't bad financial priorities at all. These are the basics of any good financial plan.
If a person wants to get out of debt, they need to have a financial priority that starts with paying off credit cards and then move onto car loans or student loans until everything is paid off. This makes it easy for people because once they pay off one loan, they can add money from their budget towards another loan.
My First Money Blunder with Budgeting
Before you read too far into my personal finance series, I’ve got a confession to make. I was a financial mess in my early 20’s. I had just graduated college with degrees in finance and communications, albeit delayed from military service, and had landed my first real job as a financial reporting analyst at a large insurance company.
I am a Type-A personality and love to plan, so I started planning my financial future. I got hooked on the idea of early retirement and sipping piña coladas on a beach somewhere. I set my goals high and when I beat them, I set the bar even higher.
I was working a part-time job, socking every penny of it away and learning everything I could about investing.
I was going to be rich!
Then came the crash. Not a stock market crash, but an emotional and physical crash from burnout. I was burning the proverbial candle at both ends. By setting financial goals that were impossibly high, I forced myself into a rat race with no finish line.
In my burnout, I went on a spending spree and quite or cut back on hours at my part-time job. I ended up spending half of the extra money I had saved.
What’s worse, this cycle went on for more than a year. I was the financial equivalent of a yo-yo dieter. I would spend four to six months diligently saving only to blow it all in a month. It was only after talking to a friend about my cycle of financial manic-depressive disorder that I was able to see the problem.
It isn’t enough to set financial goals, you have to set realistic financial goals.
Very few people get rich quick in this life. The ones that try usually end up back where they started or even worse off.
That doesn’t mean you can’t be financially successful. It just means you need a plan. You need to focus on the big financial priorities and set realistic goals.
Follow these four steps to setting your financial goals, creating a budget and getting back on track.
1) Focus on the Big Four Financial Priorities
Don’t sweat the petty stuff when planning your financial future. The future is so uncertain that planning for the big stuff is hard enough. For most people, this means: buying a house, saving for retirement, helping to pay for your kids' education and building a financial cushion for emergencies.
- These goals don’t all come at the same time so it’s helpful to create some kind of a timeline for your financial needs. Your emergency fund is an immediate need but you should have years to save enough for your other financial goals.
- The general answer for an emergency fund is at least three months of expenses but after the last recession where a lot of people experienced unemployment for years, many are suggesting at least six months of expenses.
- The average cost of tuition and fees for the 2013-2014 school year was $8,893 for state residents at a public school and upwards of $30,094 for a private college. Don’t forget to add in inflation when figuring out how much education might cost in the future.
- How much to save for retirement is the million-dollar question, literally for some. You won’t have all your current expenses in retirement, most people usually budget around 80% of their current spending. If you go by the rule that you can withdraw 4% of your savings in retirement, that means multiply your estimated annual expenses times 25 to get the amount you need saved.
- Buying a house is a toss-up. There are a lot of advantages but you can do just as well putting that money to investments and renting. If you decide to save for your own home, be reasonable about your needs. Will that extra thousand square feet make you any happier or can you be just as happy with a little less?
The important thing when setting financial goals is to write it all out. Make a promise to yourself to meet your important financial goals.
2) Be Prepared for Setbacks and Know how to Handle Them
Nobody is financially perfect and you won’t be either. Understand that things will come up that set you back every once in a while. As long as it doesn’t become a recurring event that you could have easily avoided, don’t beat yourself up too much when it happens.
Avoid high-risk investment schemes and do not commit more than 10% of your total wealth to any one investment. Having a diversified portfolio of investments can help from getting set back too far when the financial markets sour.
3) Build a Support System around your Financial Goals
One of the most important ideas in budgeting and setting financial goals is a good support system. Some of those poor financial decisions caused by behavioral traits that we all share but have a hard time seeing in ourselves. Start a group that meets once a month to talk about setting financial goals and challenges you’re facing. At minimum, talk with a friend or someone that’s not afraid to give you their honest opinion.
It was this idea that helped me get beyond my cycle of financial yo-yo dieting and I highly recommend it to everyone.
4) Are you Only Living for Tomorrow?
There is a limit to what you should sacrifice for your financial future. Notice that nowhere in the big four things for which to save is living a better life. Why?
Because you should be doing that now! Life is too short to be spending every waking hour planning for the future. Work happiness into your budget so you can reach your financial goals and still live life!
How to Create a Budget You can Keep
Now that we have a better idea of our priorities and sensible financial goals, we can start seeing how to get there.
Before you begin your budget, you might want to check your credit report and credit score. I check my report annually for free but was surprised recently when I checked it again and found a few debts that I had forgotten to put in my budget. Not budgeting for these could have thrown the entire process off so it’s important to know where you’re starting.
I use Transunion to check my credit report and monitor my credit score when I can’t download it for free. What's your FICO score? Find out now when you check your credit report for $1 at TransUnion!
Budgets are tough to keep. I’ve dropped my share. The great thing about budgeting is that it really doesn’t have to be forever. Most people set their budgets with no time frame in mind. They follow their budget for a few weeks, maybe even a month but quickly lose interest because they’ve got nothing to look forward to.
Don’t plan on budgeting forever! Start with a three-month plan. This will give you an end in sight and will help you stick with the plan. After three months, reevaluate your expenses and set a longer-term budget for maybe six months. The idea here? It takes about 66 days to form a habit.
That’s just over two months so even if you only make it through your three-month budget, you will have formed some great budgeting habits. Make it through the six-month budget and you may find that your habits are so well-formed that you follow your spending plan without even trying!
With your time frame set, it’s time to tackle budget basics:
- Take your money for savings out first! Most people budget out their expenses first and find they have nothing left to save. Figure out how much you need to save to meet your financial goals and take that amount out of your budget first.
- List all your expenses on a sheet of paper without the amount – order your expenses from most to least important, without any consideration to how much each costs. Talk about which you might be able to cut or drop altogether if things get tight. This really helps with those little expenses, the things that you probably don’t need but you look at the low monthly cost and think, “well, it’s not that much anyway.” Prioritizing and thinking about your expenses without looking at costs can really put things into perspective.
- Work through your budget – After these first two steps, work through your budget from income to expenses.
If you’ve got extra money at the end of your budget, congratulations! Take some of the money and set it aside to help meet your financial goals but don’t forget to treat yourself as well. Consider saving a little more in the first month or two of your budget just in case you missed a couple of expenses.
The bigger problem is what to do if you don’t have enough money to cover your budget. That’s where your expense prioritizing comes in. If you still can’t meet your budget even after knocking off a few unimportant expenses, it’s time to really think about where the shortfall is coming. Is it a chronic shortfall or just because you’ve got a few extra expenses in particular months?
If your budget shortfall is something that is going to persist, you need to make more money. You can either get a better job or get another one. I covered 8 real ways to make extra money in a recent post, most of which I’ve tried myself.
Depending on how deep your budget shortfall is, you may need to consider some of these side-hustles while you look for a better paying primary job. Whatever you do, resist the temptation to cut back on your savings. Otherwise you will be stuck in the same cycle of living paycheck-to-paycheck for the rest of your life.
Budgeting really doesn’t have to be difficult and most people quickly get to a point where they are meeting their financial goals without even thinking about them. Setting financial goals and then following a simple process on a budget you can keep.
Read the Entire Budgeting Series
- Holiday Budgeting Tips: How to Do It Right?
- 6 Budgeting Hacks to Beat Your Savings Goals
- Budgeting Help and Tips I Used to Save $54K in Interest
- The Un-Budgeting System that Makes Budgeting Easy
- Top 10 Questions on Budgeting and How to Save Money
About the Author
Joseph Hogue is a financial expert and investment analyst. After serving in the Marine Corps, he started his career investing in real estate before becoming an investment analyst for some of the largest private investors. He's appeared on Bloomberg and on CNBC as an investment expert and has published ten books in personal finance. Now he helps investors reach their financial goals and invest in the stock market with some of the same advice he used when working for the rich.