The following is a contribution from Graham at MoneyStepper.
After finishing university, I managed to secure a place on a graduate scheme at a professional services firm. It was the first time in my life that my salary hadn’t been earned by the hour working in bars, cafes, shops, market stalls and through any other work I could find.
I was excited. Finally, I was going to be earning enough money to start building my financial wealth. I was going to be rich!
However, what it took me many years to understand was that without specific focus on my budget, my goals and becoming wealthier, I wouldn’t progress in my financial life.
Setting a Budget
The first stage of improving my financial wealth was setting a budget. Before this, I’d often set a budget for a specific event (I won’t spend more than £300 at this festival, I need to save £600 for this holiday, etc), but that was the end of my budgeting process.
I thought of budgeting as being something only performed by businesses when trying to obtain funding and by absolute geeks! Well, the latter may be true – but there is nothing wrong with being a geek.
So, after a couple of years of the purse strings seeming very tight every month, I started creating a monthly budget. This was a good start, but didn’t really achieve much by itself.
Change Behavior Based on Your Budget
The problem was that I would create my budget at the beginning of the month. Then, at the end of the month, I would record all my purchases and note that I had overspent by 30-40%.
To address my overspending, I would either say “next month I’ll be better”, or I would simply increase by budgeted spend for the following month.
Both of these actions had no benefit to my net wealth.
Luckily, I managed to identify this trend and fix it. I started monitoring my budget weekly to determine how I was performing against my monthly budget. I made a pretty spreadsheet with beautiful graphs (I mentioned I was a geek, right?) 🙂
All of a sudden, because I was focusing on my budget, I started to change my actions during the month to ensure that I met my budget. If I’d had a big spend on a night out, I would have to cancel a night out in the following weeks, for example.
This helped. I was starting to come in under budget each month as it became a competition with myself. Being an incredibly competitive person, I loved that I was winning this competition. This was a brilliant cycle of success as I wanted to beat myself by more each month.
Something Still Wasn’t Right
My budget was meaning that I was reducing my spending. However, nothing was really changing in my overall financial situation and I didn’t understand why.
Luckily, I completed my budget one morning before work. My first meeting that morning was with my boss to discuss my progress against my goals. In our business, we set goals for the year at the beginning of June and they don’t get looked at again until the following March.
We then run through each goal and say “oh yeah, I remember that – no, I’ve not achieved this”.
During this meeting, it hit me like a rock. Nothing would be achieved at work, in my personal budget and my life without the following process:
- Set SMART (specific, measurable, achievable, realistic and time-bound) goals
- Keep these goals at the forefront of your mind at all times
- Monitor progress against these goals on a regular basis
- Modify behavior in order to achieve these goals
- Refine goals on a semi-regular basis as our environment changes
Setting Financial Goals
Another thing I didn’t understand in my personal financial life was that setting goals is very different from budgeting. Budgeting takes each area of expense and estimates the amount to be spent each week, month or year. However, it is not inspirational – and aspiration is key to success.
And this is where financial goals come into play.
I now approach this in the following way:
1. I keep a very short-term to do list of actions to be taken each day or week in order to reach my longer term goals – this will usually contain 3-5 very short term goals that will be completed within the next 7 days.
2. I maintain a monthly budget to set and record my short-term goals. My goal for the next month is to only spend X, or to save Y. This is caused by the results of step 1 and will lead to the success of the goals set in step 3 and 4.
3. Annual goals. I also set around 10 annual financial goals which are conducive to increasing my net wealth. My 2014 goals are documented (and reviewed monthly) on moneystepper. Each month, I check my progress and decide whether the goal is still appropriate. Based on successes and failures, I can again modify my behavior each month in order to reach my annual objective.
4. I also have long-term goals. These have a time frame of 3-5 years, and I currently have 4 goals. I would recommend having fewer goals for this objective, all related to different aspects of your financial position.
Mine are related to property ownership (both residential and investment), my retirement fund, my passive income streams and my taxable investment accounts. Each has a detailed monthly plan of how I will reach this ultimate goal. However, I only review these goals on a quarterly basis to ensure my overall progress is on track.
5. The dream. The ultimate end. This should only be one single goal. It should be very high level, with a time frame of between 10 and 30 years. Mine is to achieve financial freedom, which I have defined as having (achieved every month for 3 years) truly passive income (the income I would obtain if I just sat on the beach every day) which exceeds my total expenses and my previous salary combined.
Therefore, I would be able to pay for my expenses, and then still have enough earnings which would be equivalent to working a full time job.
My results were also immediate. I’m embarrassed to say that I only started to adopt this approach 2-3 years ago. However, as soon as I started making this a priority, my results almost immediately changed. I went from my net wealth staying static, to marking 50-100% increases in my net wealth each year since.
How do you define your budget and goals? What impact has it had on your long-term net wealth progress?
Photo courtesy of: Sweet Dreamz Design
This article was written by Graham from moneystepper.com. Moneystepper provides advice on taking small steps every day, which have a much bigger impact over the long-term. Daily posts cover every aspect of money, investing, saving, real estate, taxes & the economy: everything you need to increase your net wealth in the short, medium and long term.