New Rules of Budgeting: Focus on Your Dreams

by Kimberly Palmer on 11 October 2010 6 comments

The following post is an adapted excerpt from Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back, a new book by Kimberly Palmer.

Let’s face it, old-school budgets are boring. Numbers, restrictions, lists, blah. But the new rules make figuring out a spending plan almost as fun as catching an afternoon matinee. Okay, maybe not that fun, but they will guarantee you can afford that matinee, as well as a five-star restaurant meal afterwards.

Here’s how it works:

Prioritize what’s important to you, even if it’s unusual.

Not everyone wants a big wedding and a house, followed shortly by babies. (Although, if you do want that – and I certainly did – then go for it.) Some people dream of running their own business from their home. Or traveling around the world for a year. Or living on a sailboat. The best budgets start with a list of your wildest dreams. What would you do if you had limitless money?

Once you decide on that list, then do a little analysis on where your money is actually going. You might find that even though you dream of quitting your job, you spend $200 on work lunches each month instead of putting that money into a “job-free” savings fund. Or that you just spent $20,000 on a car when you should stick with the bus so you can take off for Guatemala in December.

Research recently published in the Journal of Consumer Research found that people actually miss out on spontaneous opportunities to save when they focus on logistics instead of their abstract goals. The lesson? Think big, and the money will follow.

Focus on your dreams, not your needs.

Every Sunday, my Dad used to ask us what our “rocks” were for the week. He would remind us to think of our time like a bucket: If we put the rocks, or most important things, in first, then the less important things – pebbles, gravel, and sand – would filter in around them. But if we put the less important things in first, the important ones would never fit. In other words, you can’t fit a rock into a bucket of sand.

The same concept applies to budgeting. We will find a way to buy toothpaste, lunch, and other daily necessities. But you might forget to invest in yourself. That’s why you have to put your dreams first. That might mean investing in a dozen books about your dream career, or signing up for a local university course.

Put your time ahead of “stuff.”

It’s easy to forget the power of outsourcing. After all, when you’re busy, you barely have time to think about what you could pay someone to do for you. But taking an hour to find a cleaning service and signing up for grocery deliveries will save you many hours, every week, going forward. And while coughing up the money for those services might seem wasteful, it’s not, because your time is more important. (Unless it’s not – but a quick cost-benefit analysis will tell you whether the price is justified. $5 for delivered groceries instead of two hours shopping? That’s an easy one.)

In fact, new research shows that maximizing our leisure time is the best thing we can do with our money in order to increase our happiness levels. Researchers at University of Wisconsin-Madison and the University of Chicago found that spending money on enjoyable activities, such as vacations, movie tickets, and hobbies improved happiness levels while spending on necessities such as clothes and cars did not. The reason appears to be that our happiness levels are tied to our “social connectedness” – and leisure spending improves our social connectedness.

One of my favorite interview subjects in Generation Earn is Kimberly Wilson, a yoga teacher and entrepreneur in Washington, DC. She not only runs one of the most popular yoga studios in the area, but she also writes books, sells her own line of eco-friendly clothing, and runs a foundation that introduces young women to yoga. She’s also great with money, largely because she refuses to play by the traditional budgeting rules.

When I interviewed Kimberly, she had recently borrowed $500,000 in order a build a new yoga studio. She was also saving to buy a cabin in West Virginia so she could escape from the city on weekends, and made frequent fashionable purchases from discount stories such as Target and H&M to help inspire her own designs. She also frequently indulged in little items that made her happy: fire logs, soy lattes, and bath bombs.

But there was also a lot she didn’t buy: She skipped shoe purchases and expensive jewelry. She rarely ate at expensive restaurants. And she was perfectly content sharing her small, raspberry-painted condo with a dog, two cats, and her boyfriend.

To me, Kimberly exemplifies this new style of budgeting. She invests in herself, doesn’t feel guilty about buying “luxuries” that make her happy, and skips traditional expenditures (shoes and restaurant meals) that aren’t important to her. As a result, she’s living her entrepreneurial dreams – and has enough money in the bank to back them up.

If you enjoyed this excerpt, check out more great tips from Generation Earn: The Young Professional’s Guide to Spending, Investing, and Giving Back from Kimberly Palmer.

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Guest's picture
Brave Companion

Grocery delivery might sound like a wasteful expense for some, but it really depends on how you'll be spending the free time you paid for. If you're spending that free time watching TV or otherwise sitting on your ass, then you've wasted that cash. But if you used that time to start your own business or become a better parent then it is definitely worth it!

Guest's picture

Great post Kimberly. I'm 26 years old and whenever I even think about buying something I always think about a trip that I wanted to take on a vacation to deter me from purchasing these wants. The ultimate thought of retiring earlier than my peers is probably the main reason why I save most of my money.

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Finance Genius

That is a great attitude Miguel. At the rate we're going, I don't think the government will have any money set aside for our generation's retirement. We've got to take care of ourselves or end up working the checkout line at Walgreens when we're 85.

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Jane York

I appreciate how you don't talk down to people who selected the family track. Just because I'm not a high power executive doesn't mean my dream of having a wonderful family isn't as valid of a life choice. Kudos for getting that right Kimberley.

Guest's picture
Brandi7

"people actually miss out on spontaneous opportunities to save when they focus on logistics instead of their abstract goals."

This part is fascinating. What exacty is a spontaneous savings opportunity?

Will Chen's picture

Congratulations on your new book Kim! I've been a fan of the Alpha Consumer for a long time. I'm so glad you finally got around to putting all that wonderful advice into a book. Can't wait for the book giveaways later this week. =)