How to Use a Budget to Reach Your Goals

Posted on September 29, 2017 by Bill Womeldorf

A budget often comes off as a restricting device that nobody likes to use, however, I believe it can actually be liberating as well. The purpose of a budget is to help you reach not just your financial goals but also all your other lifestyle and growth goals.

So what are the critical steps in developing a personal budget?

Develop a financial goal
Monitor your existing finances for a month
Create a budget (determine how much you need to save each month to reach your goals, then pay yourself first)
Create a system to record your actual expenses
Review your budget vs actual data at least on a monthly basis

1. Let’s start with the first step: Develop a financial goal

Your finances are one of the 14 imperatives in creating a high-performance life. If you read my post about creating a vision for each imperatives then you may have already created a vision and a yearly goal for your finances.

A great example of a vision for the financial imperative is to become financially free. After setting your vision for this area of your life you may have selected one or two goals for that year that you wish to accomplish.

An example of an year goal could be to purchase a rental property. I’ll cover more of the details on how to analyze a rental property in another post but for now, let’s just assume in order to purchase this property in 1-2 years, you will need to save an extra $1,000 each month.

2. Next, measure your existing finances.

You cannot change what you don’t measure! I recommend next, for the following month, record all your purchases and categorize them. You can use a spreadsheet, a graph pad or an online software.

I personally use Mint to manage mine. The goal here should be to discover what your baseline looks like. Once you have your full month of data, take a few minutes to analyze it.

3. Now it’s time to create a budget.

First take your income then minus your savings goal of $1,000 each month. I also recommend adding another savings goal of saving for indirect or unexpected costs (for those rainy days).

The difference between your income and your savings goal will be your operational expenses amount. So compare what you computed to what you measured last month. If you discover you are spending more than what your budget shows, then you may need to step limits for different spending categories.

Try to think creative. Can you get less coffee out? Cook more meals at home? Buy only 1-2 drinks a week? etc. Once you limit your personal expenses and you still don’t have enough to reach your financial goals, then consider exploring additional income strategies.

4. Create a system to manage your actual expenses and view your budget real time.

Now it’s time for month two. At this point, you’ve created a budget that will allow you to reach your financial goals. I recommend now, using a system to get real time updates on how your actual expenses are comparing to your budget throughout the month.

Mint allows you to see what percentage of each expense category you’ve used to date. At the end of the month, I usually export my actual data and import it into my Personal Income Statement and Budget vs. Actual Ledger. More on these systems later…

5. Review your budget every month.

Each month I block in a couple hours to review the data results. Usually it’s around the 4th or 5th of the month (so it allows Mint to process all the expenses). At this meeting I’ll review my general income and expenses from the previous month and will also review the budget vs actual to see how I performed. If went over budget in a category for more than one consecutive month, I’ll usually look into either a plan to reduce it for the following month or re-adjust my budget to reflect a more realistic amount (by adjusting a different area).

When you use a budget and stick to it each month, you almost guarantee that you will reach your financial goals. That is because you will always save the correct amount of money each month to reach them. After a month or two, sticking to the new budget will become a habit – And you’ll be well on your way to reaching all of your financial and lifestyle goals!

Good luck! Cheers~

Bill Womeldorf is an energy efficiency consultant and real estate entrepreneur in Boston, MA. He’s typically the one with the reusable water bottle in business meetings. When we all work together, he believes, it’s possible to solve the climate crisis. You can follow Bill on twitter @BillWomeldorf and read more about self-improvement and sustainability on his blog.