A Simple 3-Step Process to Optimizing Your Budget
By Abbey L. Henderson, CFP®, RLP®, CPCC®
Creating and optimizing your financial budget requires making some difficult decisions. In the years that I’ve spent as a financial life coach, time and again I’ve seen clients struggle with budget optimization. They often find it difficult to prioritize and cut out non-essential items.
If this is your experience, I encourage you – do not give up!
A budget is one of the most important things you can do for your financial plan as it gives you the financial direction you need to make everyday decisions.
To help, I’ve come up with a three-step process that will aid you in optimizing your budget and takes into account what’s important to you. When you’re deciding whether or not an item belongs in your budget, ask yourself the following three questions:
- Is it critical to my happiness?
- Does it further my life vision?
- Can I get it at a lower cost?
Let’s dive into each question.
Is it critical to my happiness?
In 2012, Marie Kondo released the highly influential book, “Spark Joy: An Illustrated Master Class on the Art of Organizing and Tidying Up.” The work’s central idea is that you should only keep and cherish items that “spark joy” in your life.
This same philosophy can be applied to the creation of a budget. When considering a particular budget item, ask yourself the question, “Does this item/service bring me joy?”
Of course, there will be a lot of budget items that are not that exciting—things like a mortgage, utilities and health insurance—however, these necessities are critical to your happiness and security.
This question is extremely effective when it comes to all the “stuff” that we pay for without a thought. For example, you might be paying for expensive cable bills even though you don’t watch TV, a gym membership you don’t even use or buying clothes you never end up wearing.
When you rid yourself of unnecessary items from your budget, you’ll feel less burdened and ready to save for what really matters. On the other hand, there may be some of life’s luxuries that make you really happy – decide if they belong in your budget.
Does it further my life vision?
In my previous post on creating a financial life plan, I mentioned the importance of lining up your financial plan with your life vision. Sadly, many people don’t connect the two, which prevents them from making financial decisions that lead to what they actually want. Imagine having a clear vision of what you want to accomplish. Maybe it’s starting your own business, retiring early so you can travel the world, writing your memoir, or some other vision you have for the future that is meaningful to you.
A fulfilling life requires some trade-offs. There is usually a price to be paid when it comes to living your vision. Some items must be cut from your budget—that’s just the reality of it. But the good news is, when you look at your budget through the lens of an authentic life vision, you’ll know which sacrifices to make and you’ll make them gladly.
Can I get it at a lower cost?
If the answers to the first two questions are yes, would it be possible to achieve the same result with a less expensive option?
Often, we spend so much time thinking about how to make more money that we forget the importance of limiting and lowering our expenses (hence the value of a regular financial checkup).
There is often a very high accumulative cost to small, periodic spending habits.
For example, if you typically purchase a latte every day, could you buy a less expensive option – like an americano – that you would enjoy just as much? Or maybe invest in your own espresso machine to make your own lattes for less?
Can you negotiate with the bank to lower your interest rate? Can you call the cable company and ask them for a more competitive package?
While doing all this requires time and effort, it’s possibly worth it – instead of spending hundreds, or even thousands of dollars on something that you could get for much less.
As a financial life planner, my specialty is helping people make smart financial decisions today as they work steadily toward their vision for the future.
If you could use some help optimizing your budget and lining it up with your big-picture vision feel free to schedule a complimentary Financial Life Plan Discovery Session with me to learn more.