Goal-based budgeting is designed to keep your eyes on the prize and focus on setting financial goals. It keeps you from getting distracted with other financial priorities.
What is Goal-Based Budgeting?
This type of budgeting is different from regular budgeting. That’s because it usually involves aggressive saving or changes to your budget. It may mean cutting out late-night Amazon splurges in favor of saving up for a new car. Because it’s designed to be aggressive, you can burn yourself out if you do it for too long.
Often, goal-based budgeting techniques are only good for a couple of months. They’re better for short term goals. Cutting back on Prime movie rentals to pay off your debt can only go on for so long. Remember that any sacrifices you make are for a greater purpose. And you’ll be back to your normal financial self soon enough!
How to Create an Effective Goal for Your Budget
You need to be specific with what you’re trying to achieve. Set goals that are actionable and measurable. Don’t just say you want to save enough money to buy a house. Instead, figure out exactly how much you need and when you need it by.
- Bad Goal: “I want to save money for a house.”
- Good Goal: “I want to save $15,000 for a down payment for a house by this time next year.”
The same could be said for paying down your student loan debt. Or even paying off the credit card you used for a long weekend in Vegas. Figure out how much you want to contribute to paying off your debt and when you’d like to achieve that goal.
How To Create a Goal-Based Budget
Common Goals in Goal-Based Budgeting
You may use your goal based budget to save for a vacation this summer. But often, these aren’t the types of financial goals people are aiming for. Commonly, people use goal based budgets to pay down debt, save up for a big expense, or creating an emergency fund. A car downpayment to get you to work would be a good goal to have. Whereas, looking to save up for a new BMW to impress your friends would not.
Be realistic about what kind of goals you want to set for yourself. Overall, goal-based budgeting is an effective way to focus your attention on a single goal. Like we said, it’s probably not best for the long-term. You’ll burn out.
But if you’ve got a financial goal you’re itching to achieve, trim away the excess spending and dedicate that money to it. You’ll be amazed at what you can do.