Taking control of your finances can feel like a big step, especially if you struggle with overspending. Fortunately, there are several personal budgeting methods that can help. One of the easiest to learn about and implement is the goal-based budget.
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What Is a Goal-Based Budget?
A goal-based budget is one of the most flexible types of personal budgets since it can be customized to meet your individual needs. With this budget, you determine a specific financial goal (or goals) you’d like to achieve, then put aside a set amount each month that goes toward them.
The beauty of the goal-based budget approach is that it works for anyone at any level, and doesn’t have to conform to strict parameters. This makes it an ideal method for someone new to budgeting and doesn’t want to spend too much time and effort collecting data or minutely categorizing their daily spending.
Who Is a Goal-Based Budget Best For?
A goal-based budget is best for someone new to personal finance, and may not be ready for a structured and regimented approach. It’s also good for those who may be able to control their spending fairly well and can meet their financial responsibilities each month, but struggle to put money away for longer-term savings goals.
Advantages of a Goal-Based Budget
- Easy to implement
- Flexible for any budget
- Can be used with any set of goals
Disadvantages of a Goal-Based Budget
- By only focusing on savings goals, it can overlook other problematic spending habits
- Some people may want more structure to help them reign in their spending
How To Make a Goal-Based Budget
Step 1: Define Your Goals
Goal-based budgets can accommodate any financial goal, both long-term and short-term, so it’s really up to you what it looks like.
Below are several examples of common goals people use with this budget:
- Down payment for a home
- Paying off highest-interest debt
- Building up your emergency fund
- Contributing a certain amount to a 401K or other retirement account
- Buying a vacation home
- Buying a new car
- Saving for a family vacation
- Paying your child’s college tuition
- Paying for a wedding
Step 2: Assess Your Spending Habits
Before you choose your goals, you need a fairly clear idea of your spending habits, but this doesn’t require an in-depth analysis as other budgets may. You just need to know how much “extra” money you typically have each month so you can start directing toward your goals.
A caveat: if you’re currently overspending on a regular basis, you should consider an extensive review of your past six months of spending to know where your money’s going, what areas of your budget can be revised, and how much you can allocate to your goals each month.
You can also take the 80/20 approach where 80% of your income goes towards expenses (both essential and nonessential spending) and 20% goes towards savings goals like retirement, emergency funds, and long-term goals. If setting aside 20% is too much, you can always adjust down to 15%, 10%, or even 5% based on your circumstances.
Step 3: Implement Your Plan
Once you know how much money you have to work within a month, you’ll start saving towards your goals. Many people like setting up automatic transfers each month so they don’t have to think about it. This type of budget tends to work best when money is taken right off the top so you aren’t tempted to spend it on other things. It’s also a good idea to start small and then work your way up.
For instance, you can start by putting 7% of your monthly income towards your goals, and when you get used to the new system after a few months, you can bump it up to 10%.
Pro Tip: Use a leading budgeting app like Rocket Money to stay on top of your spending goals and to cancel unused subscriptions!
Goal-Based Budget Example
Let’s say you have a take-home pay of $3,700 each month and after reviewing your past spending you can comfortably set aside 12% towards your goals. This leaves you with $3,256 to pay for your regular expenses like food, rent, insurance, transportation, entertainment, etc., and $444 for your financial goals. You’ve determined three goals and you allocate the remaining money as follows:
- Additional payment towards student loans: $175
- Down payment for a house: $150
- Emergency fund: $119
| Category | Amount |
|---|---|
| Take-home Pay | $3,700 |
| Set aside for Goals (12%) | $444 |
| Additional Payment Towards Student Loans | $175 |
| Down Payment for a House | $150 |
| Emergency Fund | $119 |
| Remaining for Regular Expenses | $3,256 |
Does a Goal-Based Budget Really Work?
Any type of budget that you incorporate into your life and stick with will be beneficial and can help you learn strategies on how to spend less money, and a goal-based budget is one simple way to get there. Many people like the ease and versatility of this budget and find they’re able to save towards their goals without putting in a ton of work.
How Does the Goal-Based Budget Compare?
| Type of Personal Budget | Description |
|---|---|
| Traditional Budget | Subtracts monthly expenses from income, ideal for beginners. |
| 50/30/20 Budget | Divides income into 50% for needs, 30% for wants, and 20% for savings/debt. |
| Zero-Based Budget | Allocates every dollar of income to specific categories until it equals zero. |
| Goal-Based Budget | Focuses on specific financial goals with some flexibility. |
| Spending Cap Budget | Sets a maximum cap on monthly spending to encourage savings. |
| Envelope System Budget | Uses physical cash in envelopes for different spending categories. |
| Pay Yourself First Budget | Prioritizes savings by setting aside money for savings first. |
| Sub-Savings Accounts Budget | Creates detailed savings goals within a primary savings account. |
| Anti-Budget Budget | A relaxed approach: save first, pay bills, and spend the rest freely. |
How do I choose the right goals?
A good way to choose your goals is by using the SMART goal approach:
- S – Specific: Your goal should be detailed and clear. Example: I will save $450 a month for the next four years for a down payment on a home.
- M – Measurable: When your goals are measurable, you’ll be able to track your progress and know how you’re advancing.
- A – Achievable: Set yourself up for success by only choosing realistic goals.
- R – Relevant: Your goal should align with the rest of your life and your finances. For instance, saving up for a new BMW may not be the best choice if you’re still paying off student loans.
- T – Time-bound: Know when you hope to achieve your goal.
What if I need more help with my finances?
Consider using another budget in tandem with the goal-based budget like the 50/30/20 rule, where 50% of your monthly income is for essential spending, 30% for discretionary spending, and 20% for savings. Or, you may like the structure of the envelope budgeting system where you put a predetermined amount of money into different envelopes each month (including one for savings) and that’s all you have to use for the month.
What about emergencies?
Ideally, you have an established emergency fund to address unexpected expenses, but if not you may have to temporarily pause your savings goals and divert this money for a few months until you’re back on track.
