So you have a beautiful dream built from your First Budgeting Session. You have ruthlessly cut out unneeded partitions from your budget and savagely decreased others. You, my friend, are on your way towards your dream!
That being said, you will probably get to your dream faster if you save more. It isn’t enough to just be “within” your means - not having negative balances or bounced checks to worry about. Achieving your dreams is going to take consistent effort to move towards them. We do that through Savings.
Quantify Your Dreams
You have a little bit of experience now with living on a budget. Now you need to transition from asking yourself “what can I cut?” to “how much do I need to give up to get what I really want?”. The best way to answer that second question is to quantify your dreams in real dollars and cents.
When my husband and I had the baby conversation, we both had no clue what babies would cost. Actually, it was worse than that - we had both heard the random figure of $250,000 from birth to adulthood, with additional spending during the young adult years. My husband was (understandably) terrified by this figure. I don’t remember where we heard it, why we heard it, or when, but I do remember the impression it made on two young newlyweds. In the end, there was only one way for us to find out what WE would spend - we had to dig through some research, ask hard questions, and determine the true lifestyle we wanted to have and what opportunities we did or did not want to furnish for our children.
In this Budgeting Session, you will be doing something very similar. You will be looking seriously at your dreams, splicing and dicing them apart in different ways, and creating estimates for how much those facets of your life will cost. It may be helpful to divide this overwhelming mass of wants into three general categories - Dream House, Dream Hobbies, and Dream Lifestyle.
While my husband and I haven’t refined our Dream House all the way, we do know a few things - we have two general locations, we know that my husband needs his own office/studio space, and we know that a craft/utility room with a sprayable floor (with built in drain) would be very nice so that we could do “outside” projects inside (because I like to not be too cold, too hot, or really too anything and I don’t want to have battles over messes with the future littles). That works out to roughly 3-4 bedrooms (depending on how many kids and whether a bedroom is actually used as an office). I also LOVE having a separate downstairs bathroom off the kitchen or entry area for guest use. We also want a den room that kids can comfortably have multiple friends over, because my theory is that bedrooms are for sleeping in, not living in, so they can be postage stamps and everyone can just be happy with that. Your Dream House is going to look different - it might include a pool, enough acreage for your own golf course, or be a homestead. Or, maybe you love to live outside, and your Dream House is one in the middle of a hubbub of outdoor options and you genuinely only want a kitchen, bedroom, and bathroom. Your best way to find out how much it will cost is to look at things similar to what you want, in an area that you want, and create an estimate.
In our case, most homes with our specifications hover between $380,000 and $450,000. Look on Zillow, Trulia, or other home buying/selling sites to gain a better idea of how much your dreams cost. Estimate what that equates to in terms of a downpayment size you are comfortable with and a monthly mortgage amount. If you are interested in particularly attractive built-in features, such as a pool or archery range, research how much it costs to purchase/install a few different options that you would be happy with (or the one that you know you will love). Ignore whatever “feasibility” alarms go off in your brain - simply write the numbers down.
Follow the same process for your Dream Hobbies and Dream Lifestyle. What hobbies do you already have, how expensive are they, and how much would you use them if money weren’t part of the equation? Are there Dream Hobbies that you have always wanted to try out? What kinds of estimates are available for establishing what is needed for those Dream Hobbies? In terms of Dream Lifestyle, how much do you want to travel, and what kinds of accommodations would you like to enjoy on your adventures? Do you want go on extended vacations? How many meals do you want to eat out, and what kinds of places would you want to frequent? Are there guilty pleasures you would want to indulge more frequently than you do now? Are there aspects of your life that you would want to simplify? Are you going to flat-out retire early, or are you going to keep working simply because you find meaning in it? Estimate how much more you would spend getting started on your hobbies, then estimate your expenses per year on these Dream Hobbies and Dream Lifestyle than you currently spend. Write those numbers down.
Take the downpayment amount from your Dream Home exploration and the startup Dream Hobbies costs and add them together. Add an additional $5,000 for moving expenses if you will be moving across states, or a smaller figure of your choosing for a more localized move. This is your initial cost.
Now take the monthly mortgage cost, prorate any lifestyle expenses at the monthly level, prorate any ongoing hobby expenses at the monthly level, and add a few hundred dollars for all the things that you can’t think of right at this moment. This is your maintenance cost.
Chronologize Your Dreams
Now that you have articulated how much your dreams cost in terms of startup and ongoing expenses, it is time to articulate when you want to get there. While “right now” sounds pretty grand, it is also highly improbable that that is a feasible financial option. Set a number of years that you want it take to achieve your dreams - somewhere around 5-10 is right for many people, although others may need more or less, depending on current Savings, Debt, and Incoming Money. Set a timeframe that you feel good about, and don’t be afraid to come back to your timeline as your Savings experiences commence.
Work Your Way Backward
Let’s say you decided on 5 years. Take the initial cost calculated above and divide by 60. That will give you a monthly amount to save for 60 months, or 5 years. Add $200-$500 to this monthly amount (to accommodate for the crazy setbacks that will occur within those 5 years - there will be plenty of them!).
Now multiply the maintenance costs by the number of months you like to have as your emergency fund. This will likely be a lower but still very significant number. Divide it by 60 months (or however many months correlates to the number of years you selected).
Add the two numbers together. This is your monthly Savings goal.
Subtract your Savings goal from your Actual Savings each month (or the monthly average). This is the number that you need to move from Expenses into Savings.
But It’s Too High!
Your number is going to be large. It may even be over what you make in a month. If not, congratulations on genuinely wanting simple things out of life! That is fantastic.
Let’s talk about how to increase Savings. The first way is to slash Expenses. There are as many ways to reduce expenses as there are expenses in the world. Drink water with your meals, not pop. Cook your meals at home. Cancel cable. Consider whether you actually need a cell phone, a car, or a desktop computer. Buy used instead of new. None of that advice is new to you, and it’s not going to be the focus of this section - there is an entire frugal living series for that.
The other way to increase Savings is to increase Incoming Money while maintaining Expenses. In other words, you can live a $30,000 a year lifestyle while making $80,000 a year and pocket the savings. While many people advocate for “Side Hustles”, it has been my experience that working for companies almost always yields more consistent and higher figures. That’s not to say that your side hustle can’t make you money - there’s a reason they exist, and if it’s a hobby you enjoy anyway, than why shouldn’t you? - but overall your bread and butter income will most likely come from more traditional sources.
If you have been considering a career change to a higher paying field, have been wondering whether that promotion’s salary increase is worth all the extra work, or a multitude of other things, let this answer it for you. If your dreams are worth the short term discomfort, then do it! If not, perhaps you need a different approach, such as moving to a less expensive part of town or selling one of your vehicles. Also consider money-generating ventures, such as mutual index funds, that will enable your money to grow at a faster rate than your checking or savings accounts. (This is a particularly good option for individuals who aren’t sure whether they want to continue traditional work after attaining their dreams, because you can live off dividends before you hit retirement age, meaning that you can actually lower your monthly cost of living by paying it in advance).
I spend most of my spare time playing with spreadsheets, my violin, or planting vegetables in my garden in hopes of bringing new insights into frugal living. Please enjoy, and don't forget to sign up for our monthly newsletter here.
Disclaimer - Mrs. FB is not a financial advisor. Nothing in these articles should be construed as investment or other professional advice, but rather personal opinion. Some links in these posts may be to affiliate sites - no products are advertised through this site that have not been personally used by the FB family unless expressly labeled.