In today’s fast-paced world and with the ever-increasing cost of living, managing finances can be a daunting task. Nevertheless, growing inflation and the ever-changing economy are the reasons why it is essential to take control of our finances and make every penny count. This is where the concept of values-based budgeting comes to play. This is a unique approach that can help you achieve your financial goals better by providing a healthy perspective on what you tend to spend money on and ensuring you spend what you have on the most important things.
- Values-based budgeting is a budgeting strategy that lets you identify your core values and prioritize how you spend on them based on their importance.
- Values-based budgeting helps you make informed financial decisions by ensuring you spend on only the right things and those that align with your values per time.
- To practice values-based budgeting the right way, it is important to first understand what your values are and identify how these values will be demanding financial investment from you. That is, identify how you will spend to satisfy those values.
- When practicing values-based budgeting, it is important to prioritize needs over wants and ensure discipline by sticking to the budget.
What is values-based budgeting?
Values-based budgeting is a budgeting approach where you allocate your financial resources based on the perceived value or importance you attach to needs, wants, and other financial goals. When practicing values-based budgeting, you lay aside what your history of spending has been and you focus on what financial investments would provide the most value and gratification for you per time. This budgeting strategy lets you allocate funds to categories effectively, prioritize important spending categories, and make better-informed financial decisions.
Note that values-based budgeting isn’t that financial strategy for saving six figures in six months or having more than enough for retirement. It is rather a financial planning tool for ensuring you maintain a state of happiness and healthy conscience on how you spend and what you spend on. Because what makes each person happy widely differs, values-based budgeting is highly personal and presents individuals with different things to focus on.
Values-based budgeting might also be that tool you need for critiquing your finances over the years and getting a better understanding of what and where your money goes. It will help you realize if you’ve truly been spending money on the things that matter most to you and will grant a satisfying approach to budgeting.
How does values-based budgeting work?
Unlike other budgeting strategies, values-based budgeting might appear vague and rather not straightforward. However, it is also fairly easy to follow. It only requires more introspection, discipline, and truthfulness. And in all honesty, the results are fulfilling for anyone who truly follows through with the process.
Here, we have broken down how values-based budgeting works in steps.
Step 1: Identify your financial values
Values-based budgeting begins by identifying what things matter to you most finance-wise. That is when it comes to spending, what would you consider to be your priorities? These priorities could be things you can’t avoid spending on such as mortgage and transportation or other things that mean so much to you such as your hobbies or a just cause you are staying true to like volunteering and donation.
Hobbies like traveling, sports, adventure, food, or book collection come with their share of expenses, but since they mean so much to you, you consider them of high value and factor them in with other expenses like groceries and child care.
Step 2: Allocate funds to these values based on your monthly income
This is the step where you get to create your budget using the values you identified. You can group your values into categories, order them on a scale of preference and allocate funds to each based on your income. You do not have to assign an equal percentage to each category as this may not work. For recurring categories like mortgage and groceries, your previous expenditures can guide you on how much you think you should spend on them per month.
If any of your values are left out unattended, this could be an indication that you are spending too much on other things, say groceries and eating out, for example, and that you need to trim how you spend on them. It could also mean that you need to reprioritize to ensure that the least important is what is left out, should your income not be enough to cater to all.
Note that the goal of value-based budgeting is not to make sure you satisfy all your values since indeed, human wants and needs are insatiable. It will however help you to put more thought and introspection into how you spend. It lets you have frequent heart-to-head discussions with yourself to identify ways you can create a fulfilling and content lifestyle.
Step 3: Track your spending to see if you’re staying true to your values
Did you end up spending too much on charity at the expense of not having enough groceries? These are things you should look out for over the months as you continue practicing values-based budgeting. It is also possible to identify values that seem to be against your financial values or are too much than what your income can bear at the moment. You should consider finding alternatives to them or pausing on them altogether until you get an increase in your income source.
That said, you would need to adjust your values-based budget periodically, perhaps quarterly or biannually. As you age, get married, change jobs, or switch environments, you may find your values also morphing along with you and that may require you to make significant changes to your budget. If a value no longer reflects your priorities, it is okay to change it without feeling guilty.
Pros and Cons of Values-Based Budgeting
- Values-based budgeting encourages continuous improvement, self-awareness, and financial coordination.
- It ensures financial accountability and result-driven spending.
- It does not just promote financial control but is also effective for ensuring purposeful and fulfilled living.
- Can be time-consuming to implement.
- It can be challenging to accurately define what your values are, and depending on what stage of life you are, your priorities may be changing way too often.
- Could require significant changes in lifestyle and spending as often as you update your values.
- Because values-based budgeting tends to focus on what makes you happy at the moment, it is not the most effective budgeting tool for savings, paying off debts, or achieving long-term financial goals
- Unless you’re very disciplined, values-based budgeting can get you spending way more than you can afford on things because you consider them gratifying.
How do I define my values?
Defining your values requires a great deal of self-awareness and introspection. Your values are more than just hobbies and things you are most sentimental about. Notwithstanding, your values should not be hard to figure out. Start by listing out things that are most important to you such as education, friendship, beauty, charity, and fun. How would these values require you to spend? This could be enrolling for a master’s degree, planning quarterly vacations with friends, or giving to charity monthly.
Another way to define your financial values is to think about what your perfect life would be like. Ask yourself questions like, “If life was truly perfect and money was not a problem, what would I be doing?” “Where would I be?” “What things would truly make me happy?” While the answers you provide will not be an absolute indicator of your values, they will help you identify them faster and guide you through the decision-making process.
Note however that there is a thin line between spending on true values for worthwhile gratification and spending extravagantly on things that will only provide momentary satisfaction, such as alcohol or binge outdoor eating. Discipline is a key factor in values-based budgeting and you must always let it guide you or you may find yourself going out of the way to spend on just about anything seemingly satisfying that comes to your mind.
Conclusion
When it comes to spending and what to spend on, individual priorities and preferences will never be the same. Values-based budgeting is that unique budgeting strategy that lets you live a healthy financial life on your terms. You do not get to live someone else’s life based on what they consider to be a priority, yet, you stay in control of your finances because you focus on only the important things. If you are seeking to gain more clarity into how you spend daily while aiming to inculcate the habit of spending wisely, then values-based budgeting is for you!
