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.
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!
Creating an Effective Goal
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.
Creating a Goal Based Budget
Decide on Your Budget System
Before you can create a budget, you need to decide what type of budget works best for you. The two most common budgeting types are zero-based budgeting and the 50/30/20 budget. We’ve got guides on both of them already and templates you can download.
For goal based budgets, we recommend using the 50/30/20 budget style. It makes it easy to bulk spending categories together so you’re not spending forever inside of a spreadsheet.
Your attention is focused on achieving your financial goals. Having a general idea of where your money goes is helpful, sure. But your financial goal should be front and center. Everything else is just support.
Savings Goals Go at the Top
We always advocate that saving should be the first priority of any budget. Saving is peak adulting. It means you’re planning and not racking up credit card rewards points. Prioritizing your savings means automating them into your savings account. They should come out of your paycheck before you have a chance to spend the money elsewhere. Your savings goal is your top priority, so it should live at the top of your budget.
If possible, create a separate savings account for an emergency fund and for you specific goal that your saving up for.
Track Your Expenses
After you know what your savings goal is and have prioritized it, it’s time to track your expenses. Your budget can give you insight into your spending habits. Don’t freak out if you’ve never looked before! Looking at your bank statement is never fun, but it’s got to be done!
If you’re spending money on a data plan for your phone, you may be able to cut back. If you see that your dining out budget is a few hundred dollars a month, you can find some extra money there too. Looking at all your expenses means you can pinpoint areas you can get more money for your goal.
Track your spending for a few months and learn where you’re overspending.
Long Term Goals On Pause
In some cases, you may want to put other long term priorities on pause to focus on your current goal. Let’s say your goal is to finally pay Sallie Mae back all your student loans in the next 2 years. It may make sense to stop contributing to your Roth IRA to make that happen. The reason is that the interest you’re paying on your loans is greater than the money you’re making in your retirement fund. A net loss.
So shift your focus to paying off your debt first and then going back to contributing to retirement. There are exceptions to this. But your long term goals may need to take a backseat to help you accomplish your current goal.
Most 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.