Creating a budget is key for managing your money and achieving your financial goals. But traditional budgeting methods can feel like a starched suit when a lot of us are more into a yoga pants sort of vibe these days. We don’t want restrictive and rigid; we want comfortable and adaptable!
If casual and flexible sounds better to you, a priority-based budget might be just right. It focuses on allocating your money based on your most important financial goals and needs so you can align your spending with what’s important to you. And if your priorities change you can change your budgeting right along with it.
1. What is a priority-based budget?
A priority-based budget prioritizes your spending according to your financial goals and personal values. Instead of allocating money to categories like rent, utilities, groceries, and entertainment, a priority-based budget starts with your most important financial goals, like saving for retirement, paying off debt, or building an emergency fund. Once your top priorities are funded, the remaining money is assigned to other expenses.
Key concept: The idea is to spend intentionally and align your financial decisions with what matters most to you. This approach helps you focus on your goals while still covering essential expenses.
2. Benefits of a priority-based budget
Aligns spending with values
Focusing on your financial priorities ensures that your spending aligns with your values. This can help you feel more fulfilled and satisfied with your financial decisions.
Promotes financial goals
A priority-based budget helps you prioritize your financial goals, like saving for a down payment, paying off debt, or investing in your education. This approach ensures that your goals are funded before other less important expenses.
Flexible and adaptable
Unlike more rigid budgeting methods, a priority-based budget is flexible and can be adjusted as priorities change. This makes it easier to adapt your budget to different life stages or financial situations.
Reduces financial stress
A priority-based budget can reduce financial stress by focusing on what’s most important to you. You’re less likely to feel overwhelmed by your finances when you know your top priorities are covered.
3. How to get started with a priority-based budget
Getting started with a priority-based budget is straightforward. Follow these steps to create a budget that aligns with your financial goals and values:
Step 1: Identify your financial priorities
The first step in creating a priority-based budget is to identify your financial priorities. These are the most important goals and needs you want to focus on. Your priorities might be things like:
- Building an emergency fund
- Paying off high-interest debt
- Saving for a down payment on a house
- Contributing to a retirement fund
- Saving for a child’s education
Take some time to reflect on what matters most to you and what you want to achieve financially. Write down your priorities in order of importance.
Brigit tip: Be specific about your goals. Instead of just saying, “save money,” identify exactly what you’re saving for and how much you want to save.
Step 2: Calculate your total income
Next, calculate your total monthly income after taxes. This includes your salary, wages, freelance income, side hustles, and any other sources of income. Knowing your total income will help you determine how much money you have available to allocate toward your priorities and other expenses.
Brigit tip: Use your net income (after taxes and deductions) to create a more accurate budget.
Step 3: Allocate money to your top priorities first
Once you’ve identified your priorities and calculated your income, the next step is to allocate money to your top priorities first. Decide how much of your income you want to allocate to each priority. This might include setting aside a specific amount for savings, debt repayment, or investing.
Brigit tip: If you have multiple priorities, consider using a percentage-based approach to allocate your income. For example, you might allocate 20% of your income to savings, 10% to debt repayment, and 5% to retirement.
Step 4: Cover essential expenses
After funding your top priorities, allocate money to cover your essential expenses. These are the necessary costs required to maintain your standard of living, such as:
- Rent or mortgage payments
- Utilities (electricity, water, gas)
- Groceries
- Transportation (car payments, gas, public transit)
- Insurance (health, auto, renters/home)
- Internet and phone bills
Make sure you allocate enough money to cover these essential expenses, as they are necessary for your daily life.
Brigit tip: If your essential expenses exceed the amount left after funding your priorities, you may need to adjust your priorities or look for ways to reduce your expenses.
Step 5: Allocate the remaining money to discretionary spending
After covering your priorities and essential expenses, allocate the remaining money to discretionary spending. This category includes non-essential expenses such as dining out, entertainment, travel, and hobbies. Because you’ve already covered your top priorities and essential expenses, you can enjoy this discretionary spending guilt-free.
Brigit tip: Keep an eye on your discretionary spending to ensure you don’t exceed your budget. It’s okay to enjoy life’s pleasures, but be mindful of your overall financial goals.
Step 6: review and adjust regularly
A priority-based budget is flexible, so it’s important to review and adjust it regularly. As your financial situation or priorities change, adjust your budget to reflect these changes. Regularly reviewing your budget will help you stay on track and ensure that your spending aligns with your goals.
Brigit tip: Set a monthly or quarterly reminder to review your budget and make any necessary adjustments.
4. Keys to success with a priority-based budget
- Automate your savings and payments: Set up automatic transfers to savings accounts and automatic bill payments to ensure your top priorities and essential expenses are always covered.
- Track your spending: Use a budgeting app, spreadsheet, or financial tracking tool to monitor your spending and ensure you’re staying within your budget.
- Stay focused on your goals: Keep your financial goals in mind and stay motivated by regularly reviewing your progress. Celebrate small milestones along the way to stay on track.
- Be flexible: Life changes, and so do financial priorities. Be prepared to adjust your budget as needed to reflect new goals, income changes, or unexpected expenses.