The benefits of goals-based budgeting

Kudos to Robert Brokamp for singing the praises of goals-based budgeting on Get Rich Slowly last week!  It’s great to set goals at the outset of any endeavor, and Brokamp takes this truism one step further for personal finance: make savings goals the entire basis of your budget, your top priority, and you’ll have a much better chance of achieving them on schedule.

Not only is it more effective to take care of savings first, it’s also easier.  One of the main deterrents to creating and sticking to a budget is that it’s nearly impossible to predict and track every dollar you spend.  But if you approach the problem from the opposite direction–accounting for savings first–it’s much easier.

Tools like separate savings accounts (not every bank has them, but some do) and automatic bank transfers can be helpful by taking some of the burden off the would-be saver.  For example, if you schedule a transfer of $50 every payday from your checking to your “vacation” savings account, you don’t have to bring yourself to transfer it manually and think about the short-term fun you’re sacrificing in the process.  It’s also very predictable–you know that in ten paychecks’ time, you’ll have $500.

A caveat: We are not advocating saving so single-mindedly that you give up necessities (and not just food and water–things that allow you to enjoy life are important too).  As Brokamp notes, you might have to make adjustments to a goals-based budget over time.  But generally speaking, shifting the way we think about our money can have a strong effect on our actions.  We try to get our members to think of their savings as progress toward goals instead of just leftovers from spending–thanks to Robert for explaining why so eloquently.