The title of this post may sound like madness coming from a personal finance blog. But don’t jump into conclusions just yet. I’m not telling you to stop budgeting at all, or even to stop thinking about any form of weekly budgeting.
You see, budgeting for the sake of budgeting is no fun at all. Budgeting only to make ends meet is not fun (although it can definitely be necessary sometimes). The fun comes from having goals and designing strategies to get there, and using your budget as a tool. This is where the real fun is.
In order to define goals and strategies to help you get there you need to have vision, and ideally long-ish-term vision. Sure, you might have some short-term goals as well, but even those short-term goals are unlikely to be accomplished within a week. You need to think long term and then break those goals into smaller steps that will fit into your weekly budget.
Start budgeting for the year
That’s right! December fun anyone?
Every December I like to sit down and finalise the current year’s budget while looking ahead and planning next year’s. It’s a fun process looking at what you have achieved, checking if you managed to stay on budget and seeing what percentage of your income was spent on what that year. I find that this is the best time of year to do that, since I have all the data already in my spreadsheets.
Once you have all your yearly data, you will know what is doable within your budget. Assuming that you have already optimised all your expenses, then you will know what you can or can’t change. If you haven’t optimised your expenses yet, make sure to do that first. Otherwise, you might think that you don’t have any wiggle room for your most important goals when that’s not true.
Allocate the basic fixed expenses that you cannot change (remember, think carefully if you can change and optimise them first!). How much are you going to spend on housing? Basic groceries? transportation? Then record how much you anticipate your pay checks to be. How much is left? Check again if this is the most optimised your expenses can be, or if you can reduce anything else. This is an ongoing task – you should really be constantly looking at optimising your basic expenses.
Remember, this is a process and I’m not saying that you can’t spend any more than the very minimum for your basic expenses. This is just the first step.
Start with your goals, both long and short term
After reviewing the current year’s budget it is time to plan ahead. I start by looking at my goals. For me, one of the biggest ones is always financial independence, followed (at the moment) by buying a home. Other goals have been saving up to have a baby and be able to stay home for at least a year, buying a car (cash of course), a phone, travel, etc.
I encourage everyone to have financial independence in their list, even if you love your job and never want to stop working. You just never know what might happen in the future. Plus, don’t underestimate the feeling of knowing that if you lose your job you will be okay, and also that no matter what happens you have choices. What are your goals for the year? Write them down.
What else is important?
Now that you know your most important goals, it’s time to think about other things that are important to you. Some of the things might be travel, eating out, donating to charity, buying clothes, etc. There is no right or wrong answer here as each person will have their own priorities. Write down what is important to you.
Too many goals, not enough money?
Okay, so now you know your goals and you also know what other things are important to spend money on. Then you reach an interesting conclusion – there is not enough money for everything! What do you do next?
Well, unfortunately there is no secret here. You are going to have to prioritise. You see, me for example, I like going out for dinner and buying new clothes from time to time. But I like financial independence even more. I love knowing that I have options and can choose how to spend my time. To me, this type of freedom is the number one priority, and it definitely tops buying stuff that I like but don’t necessarily need. Personally, I also really enjoy buying stocks and watching my investments grow. Even more than I enjoy going out to restaurants. This makes investing easy. You need to decide for yourself what your priorities are.
Of course you don’t have to completely stop yourself from spending discretionary money. Just plan and adjust according to your priorities. Maybe you can go out once a month rather than weekly? Or maybe you can allocate a portion of your budget to extra discretionary spending? It’s up to you. But once you understand your priorities, you will be able to decide what is good spending and what is waste.
Defining your priorities and budget might also give you some insights in terms of income. You might realise that you want to increase your income to achieve your goals faster. If this is the case, factor that into your budget as a priority. What can you do this year to increase your income? Can you upskill? Look for another job? Make extra income online? Your initial yearly budget is just a starting point. Personally, I allocate my salary to basic expenses, investing and some discretionary spending, but extra money that I get from other sources (online sales, online surveys, etc) are mostly spent on hobbies and fun stuff. This works well for me, find what works for you.
When you have this big picture of how much money you can allocate towards your goals and other priorities, you can start breaking down your yearly budget into months and weeks. Now you have your weekly planning, but with a long-term goal in mind. You know where you are going, and what you need to do each day to get there.
Here is a quick list to help you keep all this in mind when you’re budgeting for the year:
Gather your yearly data. How much are your basic fixed expenses?
Make sure your expenses are optimised. What can you change?
Define your most important life goals.
Define other priorities that you enjoy spending money on.
Allocate a percentage of your budget towards each item. Realistically, most people will have to prioritise to make everything fit.
Break down your yearly budget into months and weeks.
Now you have your daily and weekly map that is going to take you to your most important goals.
I hope this post has been helpful to you! Do you find it easy to plan for the year? Let me know in the comments, I would love to know what you think.