Set your goals first
January 22, 2020 | Posted by: Haystax Mortgage
When most people think about creating a budget, they usually start by looking at their income and current expenses. Once they have that done, then they look at goals and try to fit their goals into the budget.
Building a budget is no different than planning a trip. The first thing you need to do is figure out where you want to go, then you determine the when, how you will get there, and how much it will cost. You then plan on the things you need to do to make that trip happen.
If you focus on setting the budget for the trip first, you will often find that you end up settling with a vacation that does not meet your expectations, or even worse, you discover that you cannot go to your dream destination at all. The same principle is true when establishing a budget, if you set your goals first and adjust your budget accordingly you are far more likely to achieve those goals.
When you set a goal, it is important to put a realistic time frame in place for when you want to achieve the goal, determine roughly what it will cost, and then work backwards from there. For example, if you want to travel to Europe in 2 years and the cost of the tour you want to book is $4000.00 then you know you need to set aside $167 per month. If you only build your budget with a travel savings plan of $100 per month, it will take you more than 3 years to save for the trip. You might get to go on the trip, but you will not hit your goal for timing.
Most people will say “yeah but I can always pay for it on credit and then pay it off over time”. While that is very true, you still need to build the cost into your budget. Paying for high ticket items on credit does remove the need to wait, but it does increase the total cost of that purchase. If you borrow the $4000 on a credit card at 18% interest and make payments of $100 per month it will take you 62 months to pay it off. You will also pay $2154 in interest bringing the total cost of the trip to $6154.00. Make payments of $167 per month and you will have it paid off in 30 months and pay about $1000 in interest for a total of $5000.
Most people will look at that and will find ways to justify the cost. You are probably thinking of reasons why this scenario is actually OK right now as you are reading.
BUT… You also need to consider that it will take you longer to pay off the credit card, even if you pay the same amount that you were going to budget for. That means that you have a cost in your budget for longer which will impact your ability to use those funds for other things and will ultimately reduce your ability to save.
When we finance a purchase, we are in truth placing a higher monetary value on what we are buying than what we are actually willing to pay for it at the time of purchase. This is also a very important consideration when setting our goals and budget.
Goals are meant to drive us forward and give us something to aspire too. If you set your budget without knowing what your goals are, you are not only less likely to achieve your goals, sticking to your budget will be more difficult because you do not have a clear destination in mind.
Goals that we set should have definitive timelines, be realistic, attainable, and prioritized. It is fine to have lofty goals, but what will it take to achieve them? How long have I given myself to reach my goal? Am I willing to do the work? Is what I want to do even possible? Which of my goals mean the most to me? The Financial Consumer Agency of Canada provides some easy to follow goal setting guidelines and tools.
Once you have a clear picture of your goals and have prioritized them you can create a budget that is more realistic, easier to stick with, and ultimately allows you to achieve your goals.
When you are ready to start building out your budget the Government of Canada offers free online tools to help you build and monitor your budget.