Somehow we’ve made budgeting sound like something nasty that we need to do which is mandated by external forces – you know the type – the financial planner, the bank manager, the accountant.
And sometimes that is true, and there are very good reasons that those specialists want to get at least a feel for your income and expenditure patterns. This type of budgeting is often done ‘after the fact’ rather than as part of a planning process.
Our approach to budgeting comes from a very different perspective; we like to look at our budget from the point of view of value. What I mean by that, is looking at each broad category of expenditure in terms of how it makes you feel, how much you value what that money can ‘buy’ for you. And in contrast, what are you thoughtlessly spending money on that doesn’t have much meaning.
When setting up a budget we are told to write down everything we spend, and that is an important step in the process. But there is little point in doing that ‘in isolation’. Instead, we like to look at budgeting from the point of view of your values.
To clarify, we recommend you first get very clear on what your priorities are; your goals in life. When I say that, I am not yet talking about financial goals in the sense of numbers. I am talking about holistic life goals.
Getting started with values-based budgeting
The first step is a long discussion about what is important to you, as individuals, as a couple, as a family. So yes, if you deem them old enough, get your children involved in this discussion too. And before you decide their focus will be on how much money they ‘need’ for toys, I would like to challenge that perception by drawing your attention to this article.
Expect that this discussion might be difficult for all involved, as different family members may have different value sets; different expenditures that they consider essential. Take the time to argue this out, taking breaks as you need but bringing your team back to establishing common goals.
Map out all the real priorities and develop a clear set of agreed goals. Write them down and put them somewhere highly visible whilst you take the next steps. Your goals might be in the following areas – education fund, health services, housing (buy, rent, renovate), sporting activities, family relationship activities (movies, date nights, eating out), charity contributions, holidays/travel. Those are only suggestions, it is essential that you develop your own list, as it will form the foundation of the rest of your budgeting process.
Moving from values to budget analysis
Now it’s time to look at where your money is going currently. We used a spreadsheet and followed this process:
- We calculated our estimated income and expenditure over 12 month and then we tracked our actual income and expenditure. We broke the expenditure into non-discretionary e.g. electricity, mortgage etc. and discretionary e.g. eating out, travel etc. We did this month by month so we had a clear idea of the lumps in our cashflow – items like Christmas gifts, holiday travel, insurances.
- We analysed where ‘the leaks’ were. Leaks were expenditures that were discretionary but really didn’t make a huge difference to our quality of life. A good example for us was coffee from a café. We calculated the cost of those coffees over a 12-month period and realised we could buy a coffee machine and make our own and save quite a bit of money. It didn’t mean we never had coffee out, but we spent less on what had become a thoughtless habit.
- We sat together and looked at all the places where we could economise, cut out expenditure, increase income etc. We talked at length about each expenditure line and what we might do to better manage our budget in order to reach our goals. We contacted suppliers to get better deals on insurance, phones, utilities etc. We entertained at home more often and ate out less. We used the library instead of buying books. In truth there were hundreds of ways we could reduce expenditure and in deciding where to cut we kept going back to our values – was an occasional meal out perhaps good for our relationship?
- We sought out ways to ‘flatten’ our cashflow to avoid large stressful lumps like insurance payments. We found suppliers who allowed us to pay monthly without any extra cost.
- We looked at ways we might increase our income through activities like selling unwanted goods. We also used loyalty points for certain purchases where reasonable.
- We set up a separate bank account to save for travel, because that held high value for us. For you that might mean setting up an account for education. This is best set up in an account that rewards you for regular deposits.
- We regularly reviewed our budget and tweaked it as we went. Any spare money was put to the best use possible – usually in the offset account for our mortgage.
Set financial goals to support your values goals
Determine how much you need to save/invest etc. to meet each values goal and in what timeframe. Set SMART goals – Specific, Measurable, Agreed Upon, Realistic, Time Based. Set up an account for each goal e.g. education account and determine how you will reach those goals e.g. save a certain amount per month. Put those amounts into your budget spreadsheet.
Celebrate your wins
As you reach certain targets on your way to your goals, take the time to celebrate. Have a team party and a small splurge, then get back to your meeting the next milestone
Perhaps the hardest step – get outside your ego
If by now you are cringing and wondering how you are going to tell your friends you are no longer going out to dinner every week, or that you are selling your second car, and taking the bus, you need to have a good talk to yourself. We all struggle with the temptation of keeping up with the Joneses, but it is a slippery slope, and maybe the Joneses are struggling financially too but just don’t want to admit it. Maybe they will be really grateful and inspired by the changes you are making.
Keep coming back to your values and goals, remind yourself (and as necessary other family members) why you decided as a team that some expenditures were to be foregone. You’ve got this!