One of the great challenges in creating and sticking to a budget is knowing how to define what is affordable.
Common but terrible proxies for defining affordability include:
- Available balance in your bank account
- Available limit on a credit card
- Available cash flow to meet the repayment on a personal loan, car loan or AfterPay
Without an appropriate method for defining affordability we end up:
- Stuck on the debt merry-go-round
- Dipping into our savings to cover ‘surprises’
- Compromising big, important experiences
Free budgeting spreadsheets that you find on the internet don’t help here, and that is one of their flaws. They should be called trackers, not planners because they look at the past, not the future.
What causes many people to blow their budget and rely on debt is when the future becomes the present. When expenses that we thought were a way off or were out of mind happen and we don’t want to forgo them because we don’t have the money.
In defining affordability it’s useful to reflect that the purpose of wisely managing our money is to have enough money for what matters most to us today AND tomorrow – all of our tomorrows.
A good budgeting system helps us find harmony between our future and our present.
Our challenge is knowing what we will need money for in the future.
What’s over the horizon
To help you in seeing over the horizon I offer the following cash flow planning model, which I share with my coaching clients:
The model follows the prioritise what matters most principle that Stephen R Covey taught for time and task management in his bestselling book ‘First Things First’. You may be familiar with the ‘big rocks‘ metaphor Covey uses.
Refer to my article, Plan for the Predictable for some examples of expenses that fit into the top three categories.
Living year-to-year is unaffordable
If you are living pay-to-pay or year-to-year then most of your spending is in layers 3 to 6. That is not really affordable because you are compromising the important experiences in layers 1 and 2.
If you continue as you are eventually you will won’t be able to afford major ad-hoc expenses such as home maintenance and your ability to eventually quit work on your terms.
To ensure you can afford the life experiences that matter most to you, save for the significant and minimise the insignificant. I call this affording what bring you joy!