An important part of effective budgeting is setting budget goals and using your budget to help you achieve them. Your goal might be as simple as saving up enough money for tickets to a basketball game or as lofty as retiring by 50. Or it might be both! Budgeting makes it easier to establish both short- and long-term goals and track your progress toward them.
Here are some ideas for how to use your budget to help you meet your goals:
Get Beyond the Next-Paycheck Mindset
When you're always thinking about the arrival of your next paycheck, that probably means you're burning up your current paycheck and spending the next one (whether by mentally accounting for where it will all go or by putting purchases on credit cards) before you even get it. If this situation describes you, it's likely that you're living beyond your means. Since no job is truly guaranteed, and neither is your next paycheck, making it a goal to fit your expenses into your current income is an important one. This way, even if you lose your job tomorrow, at worst you'll be starting at zero – you won't already be in a hole. What’s more, getting beyond the next-paycheck mindset is essential to thinking about your long-term financial picture and how you can save for your future goals and expenses. (See Paycheck to Paycheck? 5 Ways to Start Saving Now.)
Substitute for the Short-Term
For a short-term goal, such as being able to afford tickets to a basketball game next month, you may simply be able to substitute one expenditure for another. If you normally go out to eat, maybe you can trade a meal for a game. If your budget is tighter than that, you may have to take a more drastic measure like cutting your grocery bill by eating lots of pasta- and rice-based dishes and cutting back on more expensive items like meat and cheese. (Learn more in The Best Strategy for Short-Term Savings Goals.)
Calculate Your Long-Term Needs
For a long-term goal, such as retiring by a certain age, find a retirement savings app or calculator that allows you to enter variables such as your age, amount currently saved, expected rate of return on your investment and age you want to retire by to find out how much you need to save per month to reach your goal. Online calculators can produce varied results, so it's best to try several and get a general sense for the amount you need to save. Further, they’ll only give you a general estimate of your retirement needs, but right now, we’re not worried about calculating exactly how much you need for retirement, we’re just trying to establish a general goal to work toward and give it a number to make it more concrete. Then, start considering your retirement savings as a non-negotiable monthly "expense" and adjust your other spending as needed to make room for the new amount. (Try our calculator, How much do you need to save to become a millionaire?)
Start a Rainy Day Fund
To make sure that unforeseen expenses don't cause your goals to careen off track, build up some cash reserves. Three to six months' worth of expenses is a good cushion. This will help protect you from a sudden loss of income, an unexpected car repair bill or the like. (Learn more in Build Yourself An Emergency Fund.)
Save for Fun Things, Too
If all your savings are going toward dreary activities like paying off debt and saving for unexpected car repairs and medical bills, your only incentive to save might be the fear of what will happen if you don't. Fear is a great motivator, but it's not very fun. So even if you're in debt up to your eyeballs and are committed to getting out as quickly as possible, it's a good idea to plan some modest rewards as part of your savings program. (For related reading, see Enjoy Life Now and Still Save For Later.)
Yes, a $750 annual vacation will set you back, but consider what could happen if you didn't take that vacation. You might go on a spending binge one day to compensate for how deprived you've been feeling under an avalanche of bills, or you might get sick from overwork and stress. Not only might you spend more than you would have on the vacation, but you won't get the several days of relaxation and restoration that a vacation could have brought. Depending on your financial situation, you might need to pick a less expensive reward, but you should still treat yourself occasionally, within reason. (For a lower-cost alternative, see 8 Great Ideas for Your Summer Staycation.)
Pay Off High-Interest Debt
Any debt that costs more than you can earn from your investments after taxes should be paid off as quickly as possible. As a general rule, the only low-interest debt is student loans and mortgage debt. These are considered "good debt" since it can help you earn more in the future and your money can sometimes earn more for you if you invest it than what you'd save by paying off the loan. If your mortgage interest rate is 4%, your credit card rate is 20% and your investment return rate is 8%, pay off your credit card first, then invest anything remaining. (See To Invest or To Reduce Debt, That’s the Question.)
Use automatic withdrawals to stick to your savings goals. By having money automatically deducted from your paycheck and invested in your company's 401(k) or 403(b) plan, or by setting up your own automatic monthly transfer from checking to savings or a Roth IRA, the money you don’t need in the short term will be out of sight and out of mind. (Read 5 Ways to Trick Yourself into Saving Money.)
For short-term savings, you'll need to keep the money accessible, but don't make it too accessible. For example, if your checking and savings accounts are at the same bank, it's all too easy to rapidly transfer money from your savings into your checking account. If you have these accounts at two different institutions, the transfer will take time, and that time delay may be enough to cause you to rethink your decision if you're trying to spend your savings on something you shouldn't. For long-term savings, the money should be somewhere inaccessible, like a retirement account. You’ll often have to pay taxes and penalties to withdraw retirement funds before age 59 ½. (See Should I build an emergency fund or invest for retirement? and How to Use Your Roth IRA As an Emergency Fund.)
Reduce Spending in a Particular Category
Remember how we said that budgeting isn't about deprivation, it's about putting your money to its highest and best purpose? One of your new budgeting goals might be to reduce your spending in a particular category, now that you know where your money is going, so you can put that money toward something that is a higher priority for you. (Read Top 7 Money-Saving Tips for Eating Out.)
Use Apps to Hold Yourself Accountable
Remember the budgeting apps we mentioned in section 3? They can help you stay accountable for your spending and saving minute by minute and day by day by making it easy to track your purchases, how much you have available to spend and how you’re progressing toward your savings goals. (See 4 Best Personal Finance Apps for 2017.)
In the next section, we’ll go over some common budgeting mistakes to avoid.
Budgeting Basics - Mistakes To Avoid
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