Tips, insights and information on general finance topics for better financial plans.
…continued from Why Budgets: 1. Awareness and Analysis.
As I discussed in my first post on this topic, the first step to being a conscious spender and ending up on the right side of the choice between slowly (or quickly) going broke and slowly accumulating wealth is to create and maintain a budget or budgets (multiple budgets let you see the overall impact of different spending choices).
The first installment talked about how budgets can provide Awareness and enable to perform Analysis of your spending. This post I’ll talk about how budgets can allow you to Plan With Confidence and Achieve your Long Term Goals, which is really what financial planning is all about.
Until you have Budgets and a solid feel for your spending, any time you have to think about or make a decision about money, you don’t have a whole lot to go on. Spending decisions are obviously hard, but if you don’t know your spending plans now, and lack some reasonable expectations about the future, you also don’t have any basis for making investing decisions which always involve a risk/reward trade-off, deciding how much to prioritize income in your career vs. things like interesting work or work/life balance or really anything else in the realm of the financial.
Any time a financial decision is required, if you don’t have a grasp of your spending, of course you’ll feel overwhelmed and ill equipped to make it. As a result you’ll be less likely to decide based on what you want and need and more likely to just let things happen. Budgets are a great first step to transforming from someone to whom financial events happen, into someone who makes them happen.
Achieve Long Term Goals
What are your financial goals? Buy a house? Get out of debt? Have and raise healthy children? Send them to college? Work a little less? Travel the world? Retire early? Decide when to retire? Just be able to retire at all? These, or combinations of these are fairly common answers along with a huge list of goals I didn’t include…a list that may be unique for every person that has one.
You can get lucky or make a great deal of money if you are a brilliant risk taker and achieve all of these goals and more without doing much of anything else. Many “how to be a millionaire” programs of varying quality rely on this approach or at least the promise of it. Barring that, it takes thinking far ahead which is what financial planning and retirement planning are all about. In rough order of importance you have to make personal decisions and trade-offs on the topics of spending, earnings from working, investing, taxes and insurance. Whether you achieve your goals will be entirely dependent upon these things. Each is a complex topic in its own right about which volumes have been written and lifetimes dedicated to studying, but you can learn what you really need to know about money fairly quickly..
The good news is that the most important consideration is under your direct control, and the topic of budgets…Spending. Your budgets are the tools you use to make sure you are spending in a way that lets you achieve your long term goals. Budgets provide you with one of the most important pieces of information to come up with a more comprehensive Personal Financial Plan and are a natural first step.