Welcome to the second installment of Sunburnt Saver’s Budgeting 101 series. During April, we’ll be talking budgets: why we should budget, how to prioritize your budgets, and how to plan for the expected (and unexpected!). If you like this series, please share your thoughts in the comment section and let me know what questions you’d like answered (you can even comment if you don’t like this series!)
Today we’ll be discussing how to prioritize our budget. This means deciding what’s important to you, whether that’s traveling, saving for your kids, or just having enough to pay for a crisis. If it matters to you, it’s important – no matter what your priority is. We’ll also talk about setting goals for your money, so you can plan for the short-, medium-, and long-term.
We already know why it’s important to budget. If we’re not budgeting, we’re just letting money escape to frivolous things most of us won’t even remember a year from now. But how can we determine what’s important to us in the future if every happy hour invite looks so appealing?
Before you even set up a budget, you have to determine what’s most important to you. After all, you’re making a budget because you have plans for your money, right? A budget is a road map to help you set your destination, plan your route, and arrive safely and happily.
That’s not to say setting a budget will mean there won’t be roadblocks – there will be. Much like the map to your destination, your budget will encounter unplanned adventures, detours, and bumps in the road that may delay you from reaching your goal. However, with a budget and the desire to reach your goal, you will get there eventually.
Now, on to prioritizing your goals (setting your destination) and getting there sooner rather than later!
Budgeting: Prioritizing Your Goals
What matters most to you? It’s a simple question with a ton of possible answers. Luckily, this can be a multiple choice answer and any answer you choose is right. Are your kids the most important thing? How about your spouse, your ability to relax, the opportunity to see amazing places?
Choose one or two things that are important to you, then write down what you would like to do with those important things in your life. For example, if traveling is important to you, write down things associated with traveling like “get a passport”, “visit Hawaii”, “take a tour of French wineries”, etc. If you have children, you could write down “pay for soccer lessons” “help pay for college.”
Write down these goals without thinking about the cost. Even if paying for a trip to France seems impossible right now, we’ll work on setting a budget to get you on that trip.
Writing down what’s important to you serves another purpose: being able to cut out things that don’t matter. On your list about traveling, was “watching TV” on there? How about happy hours out with coworkers or friends? Not to get to austere, but if those activities don’t make your “matters most” list, you’re going to want to cut them back – if not out entirely.
Budgeting: Short Term Goals
Now that you know what matters most to you (and hopefully that was an easy exercise – if it’s not, just think about something that brings you the most joy in life. And yes, it can be watching TV or movies if that’s your thing!), it’s time to set some short term budgeting goals.
Short term goals are anything you expect or want to pay for in the next 1-5 years. This could include new tires for your car, shoring up your emergency fund, or paying for those soccer lessons.
Let’s say next year you want to have $2,000 saved in your emergency fund. If you have 12 months to save up $2,000, you’ll need to save around $166 a month to reach this goal. However, do you already have some money saved up? Could you stretch out your timeline to 14 months (bringing down the amount you have to save monthly to $143?)
If you’re able to save more than $166, consider shortening your timeline by a few months. This will allow you to start saving up for another short term goal, and will keep your momentum going to make continual savings goals.
Budgeting: Medium Term Goals
Medium term budgeting goals are anything to expect to pay for in 5-10 years. These savings goals could include saving up for a down payment on a house, or saving up for a once-in-a-lifetime trip.
Understanding how much money to save for a down payment in 5 years or even the cost of a trip is difficult, as many things can change the cost of a house, flight, or your ability to save. However, the same idea as setting short term goals does apply here.
If you want to save up for a house in 6 years, start looking at cities and locations that appeal to you, then look at house prices in that area. While you can’t predict how much you’ll qualify for in 6 years, you can estimate how much house you could afford right now. Zillow.com and Trulia.com each offer you the ability to type in a mortgage length (15 years, 30 years) and see how much you would have to pay monthly in order to afford the house.
If your dream home (or just next home) will cost $2,000 a month, and you only could spend $1,000 a month on a home, you know you either need to make more money (either by side hustling or getting a promotion at your current job) or consider reducing some of your “must haves”, like living farther from work in a cheaper area. However, with a 6 year time frame, my recommendation would be to pick up a strong side hustle and try to get a promotion, just to hedge your bets.
Budgeting: Long Term Goals
Long term goals are long – think 10+ years. These budgeting goals can be anything from saving for your child’s college to saving for your own retirement. The goal of budgeting for long term goals is to be aware of the future, and taking small steps to get to a big impact.
There are a couple of ways to plan for big expenses, like paying for college and estimating for retirement. A recent article by the Associated Press highlights the cost of college in 2014 and their annual increases, which can help you estimate future costs. CNN Money also has an easy retirement calculator which can help show you where you are in terms of saving for retirement.
Don’t get discouraged if you’re not even close to having enough for retirement – this is why we’re creating a long term budgeting goal! Short and medium term goals will come first, but if you can, try to set aside a percentage of your income to saving for long term goals. Particularly if you want to (and can) save for retirement, save something. Even if it’s only an extra $20 a month, save something and save up enough to invest (we’ll talk about investing your savings in a later post).
The power of compound interest, where your money grows rapidly over a period of time based on return of investment and how much is invested initially, is nothing to scoff at. This calculator at Money Chimp will show you that even a small amount ($100 with a $500 annual addition), growing for 30 years at 7%, will net you $51,298. While you’ll still need more than that in retirement, think about how that small investment (just $600 your first year and $500 every year after that) yields such a substantial amount!
Homework: Write down short, medium, and long term budgeting goals for yourself, based on the priorities you already established. Try to figure out how much the short and medium term goals will cost each month, and start to incorporate this savings into your daily budget. Before purchasing something, ask yourself if you really need it, or if it will just get in your way of achieving your short or medium term goals.