budgeting and planning

Working Wealthy – Budget vs. Goals

February 15, 2022

Does the term “budget” make your skin crawl? Or perhaps even worse—does it make you shut down?

Having been a financial planner for a good part of my adult life, I’ve never really thought of the word “budget” as being a bad word. But in the context of comprehensive financial planning, it can actually derail making progress on your financial goals.

That’s right, I said it. I am a financial planner that realizes the concept of setting and sticking to a budget is not pleasant—and perhaps counterproductive.

For the most part, when someone hears that they need to set a budget, it typically means they have a set dollar amount they may spend on a set number of expenses. In a perfect world, the dollar amount one has for the budget is consistent, and the spending is level over time.

But we hardly live in a perfect world, and the practical application of a perfectly crafted budget quickly wilts in the glaring heat of everyday life and expenses.

So, if you’re not using a budget, how do you make sound financial decisions about cash flow?

At BDF, we focus on goals-based financial planning. In that process, we help our clients establish financial goals that are then funded by financial targets or bogeys.

Budgets Limit, Goals Set You Free

Consider the following two phrases:

  • Your budget this month is $10,000; do not spend any more than this; otherwise, you’ll be over your budget.
  • If you set aside $35,000 this year for savings, you can spend whatever is left over from your wages and bonuses.

The first statement limits your spending, while the second gives you a goal and freedom. And this is where most people would accuse me of simply playing a game of semantics.

You’d be right, but I’d also point out that in my experience, the client shooting for and achieving a savings goal feels a whole lot freer spending knowing they’ve saved what they set out to save. In comparison, the budgeter feels limited to $10,000 per month.

Goals Look Forward; Budgets Look Backward

Most every time a client has mentioned creating a budget, they talk about how they’ll go back through and check their receipts for how they’re spending their money. It’s a nice idea, but I’m afraid it assumes the wrong premise that what has happened in the past will happen in the future. Spending is dynamic, timely, and event-driven. Payments for orthodontia one month get replaced by a surprise car purchase the next month.

Looking back at spending history can certainly help understand patterns and where money is going. But placing a goal on a savings number gives one the room to adjust and make decisions based on real life.

Your Full Life

At BDF, we work every day to help our clients enjoy a full life. A full life, to some, means living in the moment and enjoying their hard work along the way.

To assume that a budget will create a full life for our clients is shortsighted. We’re far better positioned to help our clients live their best lives by creating goals that foster freedom and contentedness. Celebrate the journey, not just the destination.

Please keep in mind that I’m offering just one point of view. It may not be one you share or works for how you manage your finances and cash flow.

In the end, the hope is to find the method that helps you achieve your goals.