Creating and sticking to a budget is the best thing you can do to get on track financially. If you have already mastered your budget then it may be time to evaluate your budget and set new financial goals.
Examining your annual budget can help you recognize larger spending problems or patterns, financial priorities, or even changes in circumstance, all of which affect your financial goals. Here's why setting financial goals can help you budget successfully.
Your Life Circumstances May Change
When you first started budgeting, you may have wanted to get out of debt or save up a down payment on a home. But once you reach that goal, you may lose your motivation to stick to your budget.
This lack of motivation is why you need to regularly set goals regarding your budget and adjust your categories each year to match those goals. For example, once you buy your home, you may decide that you want to remodel the kitchen or finish the basement. It is better to do these projects with cash, and it can give you another goal to work towards and keep you motivated to stay on budget.
You can create a new category for these goals and funnel the money that you were using to reach your old goals towards it. It is important to make sure that each of these goals is achievable, so you do not become discouraged and give up.
So You Can Adjust Your Timeline
You may be on a tight budget because you want to reach a specific goal more quickly than previous goals. For example, you want to get out of debt in the next one to two years. This feat might mean cutting back to a bare-bones budget, at least until you reach your goal of becoming debt-free.
Once you have reached that goal, you may want to loosen up your budget a little bit and adjust your goal timeline so you can live more comfortably while working toward your next goal, like saving up for a down payment on a house or remodeling your home.
For the Short and Long Term
As you set goals, you should make sure that you are thinking about both long-term and short-term financial goals. For example, saving for retirement should always be a priority in your budget. However, retirement is a long-term goal while establishing an emergency fund of at least $1,000 is a short-term goal that you can attempt.
It's possible to work toward both short and long-term goals in a successful budget. In fact, these two things will give you peace of mind and allow you to make decisions about how you want to spend the rest of your money without worry.
To Establish Your Priorities
Some people are willing to live frugally because they take extensive vacations or because they want to be spending a lot more in a specific area in their lives. For example, I know people who live frugal so they can take extended vacations in Europe each year. Another couple I know chooses not to eat out all year so they can afford nicer cars.
Once you have your budget under control, you will be in a better position to ensure that your spending priorities match your life priorities.
For the Future
When you have children, your spending priorities will likely change. Plus, you'll need to determine how much to contribute to college each year. Another aspect you need to consider is the cost of your child's extracurriculars. Again your priorities for your family should match your spending priorities, and a budget will make it easier to check to see if everything is on the track it should be.
Budgeting is a life-long commitment. The key to making it work is to continue to adapt it to your life. Finding a good budgeting system will make it easier to continue to budget throughout your life. As you grow older, your goals and priorities will change, and your budget should change with it. An annual financial planning session will let you evaluate your budget and make sure you are reaching those goals.
Updated By Rachel Morgan Cautero.