Create a SMART Budget

It's important to have short term goals that are aligned with long-term goals. If you want to have a down payment to buy a home 5 years or 10 years from now, you should have some short-term goals for how money will be spent and saved.

With personal finances, my thinking around creating a SMART budget is that you will live well on the money available. To create a SMART budget, goals should be:

  • S = specific
  • M = measurable
  • A = achievable
  • R = relevant
  • T = time bound

Setting realistic goals that are meaningful to you will keep you motivated to stick to the budget.

“S” is for Specific

If you’re spending more money than you’re making, saying you’ll spend less than what you make is too general. Spending more than you make means debt is accumulating, which means there are two specific goals to put in the budget.

  1. Reduce spending.
  • Is it necessary to change a daily or weekly spending habit? Do you only need to alter spending for a particular month or two to spend less than you make in a year? Long-term budgeting makes it possible to see if you need to change a regular routine or whether you just need to alter spending for a particular month or two. Here is a link to information about long-term budgeting.
  • Listen to the voice in your head. Is the voice in your head saying window shopping is a danger zone? The voice in your head is a powerful voice. “the untethered soul – the journey beyond yourself” is proving to be an interesting read. It talks about the voice inside your head.
Listen to the voice in your head as you create a SMART budget
Listen to the voice in your head as you create a SMART budget

2. Plan to pay down debt.

  • Having money to make payments on debt may coincide with the spending reduction goal from #1. Save money and use it to pay down debt.
  • If you have multiple loans and credit cards, do you want to use the avalanche or snowball method to pay down debt? Would it work out better for you to make payments of equal amounts on all debts?

When saving money is the goal, be specific about how, how much, and when the money will be saved. For example, “I will have $50 deducted from my pay to put into my savings account.”

“M” is for “Measurable”

In the case of budgeting, getting specific with goals will, by default, make goals measurable in many cases. Using the example again for saving money, by having $50 deducted from your pay, you know how much money will be saved over the course of the year.

A measurable goal when it comes to money is that you will have more money in the bank (or in an emergency reserve or savings account) one year from now than what you have in the bank today. It’s possible to do this with the Money Measures web browser app. With some software, it’s not always clear whether changing your spending will mean you are ultimately robbing Peter to pay Paul. With Money Measures, you can create a budget for making payments to pay down debt and save money, while at the same time making sure you aren’t running a deficit year over year. Call us to learn the Money Measures way of budgeting.

“A” is for “Achievable”

With personal finances, “achievable” is relative to your circumstances. When you are young, an achievable goal will relate to eliminating debt and/or saving money for a car, a home, a child’s education and retirement. An achievable goal if you are living on a pension will be to live well on the income available.

When the goal is to live within your means, one thing all the circumstances have in common is that it’s the money in the bank and the money that will be coming in that dictates what’s achievable. With this is mind, knowing the reconciled bank balance for the account used for day to day spending is critical.

When someone forgets about a payment (or two) that’s due, it looks like there’s money in the bank to purchase something or put towards debt. If money is withdrawn for a purchase or to make a payment on debt, the (forgotten) automatic payments coming out of the bank can trigger a cycle of taking a cash advance on one credit card to make a payment on another card. Interest on credit card cash advances is obscene. If the automatic payments trigger payments bouncing, there will be NSF and/or other service charges payable.

Have a handle on payment due dates, know the amount of bill payments, and know the reconciled bank balance when making purchases.
Payment due dates and the reconciled bank balance

Another common problem relates to the “flexible payment options” available for services. If you have authorized companies to take minimum payments or the full bill payment from your account automatically on the due date, it may be manageable if you have only one card. If you have made this payment arrangement for multiple credit cards and loans, it would be a nightmare figuring out how much money will be in the bank at any given time. The Money Measures cloud-based app can help. Contact us to learn how.

“R” is for “Relevant”

Having goals in the budget that are relevant will give you an incentive to stick to the budget.

It’s important to have some short term goals that are aligned with long-term goals. For example, if you want to have a down payment to buy a home 5 years or 10 years from now, you should have some short-term goals for how money will be spent and saved.

If you have children, talk to your children about what matters to them because it’s not just about feeding and clothing them. Additionally, it may save you money. You could very well have your own tale to tell, as many parents do, about spending big money on gifts you are sure your children will love. Only to have your children ignore the real gift as they engage in playfully activities using the box the gift came in.

Children can be entertained by the boxes that gifts come in
Children like the boxes that gifts come in

Beware of the “keeping up with the Jones’ ” trap. First of all, the Jones’ may be living on credit. Second, the Jones’ may be trying to keep up with you. At the risk of sounding cliche, it’s not about having what you want, it’s about wanting what you have.

“T” is for “time bound”

For every long-term goal, have short-term goals that are aligned with the long-term goal. Is there something that can be done today, this week, this month, and this year?

If you spend your days thinking about the light at the end of the tunnel financially, it’s time to get a flashlight to cast light on the here and now to see what’s missing or see what needs to disappear. The first time I thought about the light at the end of the tunnel when it comes to money, the light at the end of the tunnel was a year away. Then it was 2 years away. Then it was 5 years away. Once I was doing long-term budgeting, there was no tunnel. By doing long-term budgeting, I can see what things will likely look like a year from now. If I don’t like what I see, I can look for things I can do differently in the short term to get a different outcome. It’s easier to deal with the curve balls too.

Final thoughts on creating a SMART budget

A budget created the SMART way will be a budget you want to stick to because the goals will have meaning and purpose. As well, setting goals you can expect to achieve will result in more positive thinking about personal finances.

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