The key to successful budgeting is not to limit what you spend, but to prioritise your spending. So what's the best way to go about it?
Anyone who has ever read any advice about budgeting has almost certainly come across problem of the morning cappuccino. If only, the advice goes, you didn’t spend that £4 at the coffee house every day, you could save £100 a month. And just think what that could grow into in a few years!
This is possibly the most awful piece of financial advice ever concocted. And yet it gets trotted out continuously as if it is wisdom from the gods.
The main reason it is such terrible advice is that it hits the bullseye of what turns most people off even attempting to draw up a budget: that managing our finances means denying ourselves things that we actually enjoy.
This is guaranteed to fail. As long as we think about a budget as something that will limit us, we will never follow it. The much healthier approach — and one much likelier to actually work — is to focus instead on how to prioritise your spending.
The truth is that a lot of what we have to spend money on isn’t enjoyable. Very few people take pleasure from paying their insurance or buying a new clutch to replace the one that just packed up.
Unfortunately, however, it is just reality that we have to spend a good portion of what we earn on these unexciting things. Not all of our money can go towards our next island holiday or fancy dinners with friends.
Which is why those who think it’s good financial advice to suggest that people give up their small pleasures are probably not going to be successful in changing behaviour. If we have the money to be able to treat ourselves, then we should.
What’s important, however, is to keep a sense of perspective. We can’t spend all of your money on luxuries and things we don’t really need. But if there are things that we can afford, that add value to our lives, we shouldn’t deny them to ourselves either.
Values-based budgeting
One way to approach this is through values-based budgeting. This is not simply a list of things that you have to spend money on. It starts with deciding what is most important to you.
These priorities will change through life. Someone who is young and single, might think it is most important to be able to socialise with friends. Once they are married and have their first child, their key concern could be to provide for an education.
A good way to conceptualise this is to answer the question: “If my income was in kind rather than cash, what would I want to earn?” There is some combination of things — perhaps airline tickets tickets, fast food vouchers, additional savings — that would resonate with you.
And whatever your priorities are, it’s important to identify and rank them. What do you most want your money to enable you to do or achieve?
This may not match up with what financial experts tell you should be important, or what people around you are doing, but then it’s not their money. This is your personal financial journey.
Importantly, however, your priorities can’t be a wish list of around-the-world trips and shopping sprees. If you are bothering to think about a values-based budget, it follows that you are serious about your money, and that means that one of your priorities must be financial security or financial wellbeing.
That’s a bucket of priorities that could include insurance, an emergency fund and long-term investments. What’s significant, however, is that with values-based budgeting you realise that these are actually things that you want to spend money on. If you acknowledge that they are a priority for you, they stop being a grudge item.
When you prioritise your spending, it actually becomes satisfying to see money going out of your account, knowing that it is being put towards something that you really value.
Values-based budgeting also provides you with the opportunity to decide where you really want your discretionary spending to go. If going to the gym is not that important to you, and you haven’t gone in months anyway, why keep that subscription?
But if your health is really important to you, those gym membership fees and new running shoes are worth spending money on. Or if strong friendships are near the top of your list, weekend brunches could be an important item in your budget too.
These things can’t make up your whole budget, because you still need to have your financial goals. But a values-based budget can allow you to think more clearly about what actually adds value to your life.
And if a cappuccino every morning adds value to your life, and it fits into your budget, then there’s no reason to deny yourself that pleasure. You can rather appreciate it as your money working for you, in a way that resonates with the life you want to lead.
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