If your money system is running like a well-oiled machine and you’re on track to hit all your important goals, stop reading this and carry on with your day.
If not, you might want to stick around.
I’m going to show you how you a simple, values-based money management system makes your money work for you by doing three things that budgeting doesn’t and can’t do!
How’s it working for you?
Let’s start with a few questions:
1 – How are you currently managing your money? What’s your system?
2- Is it serving you well? Does it integrate well into your life and ensure that you fund your priorities? Or, is it a pain in the backside to maintain?
3- Does it help you answer the question, “What’s the best use of my money right now?”
4- Has it helped you achieve your financial and life goals?
These are important questions that need to be addressed by whichever system you choose.
If you answered, “What money system?”, “I haven’t had any luck with budgeting,” or, “Yeah, I have a system-ish, but I’m not getting ahead as fast as I want to”, then here’s a solution: develop a values-based money system.
What’s a values-based money system?
Very simply, a values-based money system is a framework from which to align your values with your spending and saving priorities using conscious, intentional decision-making. This process helps to ensure that you achieve your most important goals.
Every step of the way, it encourages you to ask the following questions, “Is this choice in line with my values and my values-based goals? Is it in my highest, best interests?”
The process can be boiled down to the following steps:
#1 – Determine your hierarchy of core values. These provide the framework for your entire money system.
#2 – Create goals tied to the core values from #1. These help you to clarify your priorities.
#3 – Use your values and values-based goals as the framework from which to drive all your spending, saving, and investment decisions, regardless of what life throws at you.
#4 – Fund Essentials first (the things you must have to survive); then your Priorities (based on your values); and finally, do whatever you want with the rest (no need to track the pennies; we’ve focused on Big Wins instead).
#5 – Track your spending to evaluate if you’re on track or not and pay attention to 4 Key Numbers.
#6 – Automate, review, and pivot when needed.
#7 – Celebrate and enjoy financial peace of mind.
How does this differ from budgeting?
What word didn’t you spot in the steps above?
Pick up pretty much any book on personal finances and somewhere inside, you’ll be told that you need to create a budget in order to manage your money. In my next blog post, I’ll do a Compare & Contrast between my Values-Based Money System and the process from one of personal finance’s biggest names – Dave Ramsey, in his 7 Baby Steps to control your money.
For now, I want to focus on taking a closer look at budgeting.
The Cambridge Dictionary defines budgeting as follows: “the process of calculating how much money you must earn or save during a particular period of time, and of planning how you will spend it.”
The way that this is implemented for personal finance involves breaking down your spending into categories – for example, mortgage payments, groceries, car expenses, entertainment, etc – and determining how much money you should allocate to each category.
You’re directed to create some goals, such as the amount of money you wish to have at retirement or becoming debt-free, then working backwards to figure out how much money you need to save or put toward those goals to be successful.
So far so good.
Here’s the problem
What happens when you start to track your money and evaluate the amounts you’re spending in each category? How do you determine what the right amount is to spend on groceries, for example? Is it $800? $1,000? Less? More? What’s the deciding factor?
And what about those moments when you have limited cash and you need to choose between two important choices, such as building an Emergency Fund or paying off debt – which option gets the money? How do you decide? Is it a game of math? Something else?
If budgeting is so effective, why don’t more people a) use budgeting to get ahead; and b) stick with the budgets they started? There is certainly no shortage of literature – books, blogs, podcasts – on how to do it.
After years of working with families to help them strengthen their finances and trying to help them implement traditional budgets, I realized that budgeting is problematic.
3 thing budgeting won’t do for you
Budgeting answers the “what” and “how much”, but not the “why”
Every aspect of budgeting involves answering “what” or “how much” questions:
What are my goals?
What should I spend my money on?
How much money should I spend on travel.
Nowhere does it ask you, Why do you have those goals? Where do they come from? Are they genuinely meaningful for you? Will they get you the long-term results you want? Will they bring you joy? Does reducing the amount you spend in a given category line up with what matters to you?
None of the questions above shows up in traditional budgeting, yet every one of them has an impact on where you end up and how happy you are with the results.
With a values-based approach, you start by identifying what matters most to you and why. Every decision about your finances flows from there and ties in to your “why”.
Budgeting provides no framework from which to make decisions
Let’s consider a scenario that one of my clients recently faced.
Marsha* is digging her way out of considerable debt. When she reached out to me, she had no money set aside in an Emergency Fund. Prior to working with me, she read everything she could about how to pay off debt.
Here’s the thing: All the books she read advocated creating a strict budget. Some of them claimed she must start by saving at least $1,000 in an Emergency Fund to prevent further accumulation of debt should something happen – such as an unexpected repair – in the near future.
The others insisted that every dime should go toward the debt. In fact, some said that she should cut out all extras of any kind and put that money toward debt, as it takes priority over everything else.
If budgeting provided a clear, consistent framework from which to evaluate tricky situations like this one, then all the books would be in agreement about the best way to move forward. There wouldn’t be ambiguity or conflicting advice. But there is.
A values-based money system, on the other hand, provides a clear, consistent framework with which to address this situation and, in fact, any situation.
It would have Marsha ask the following question: What do I value more – having some money in a savings account, earning little interest but providing me with peace of mind; or paying off my debt as quickly as possible?
Mathematically, the answer is clear: The extra money should definitely go to paying off corrosive debt; that is, high-cost debt that is acting as a drain on her finances.
But we are not mathematical creatures; we are emotional beings. If having some money in an Emergency Fund lets Marsha sleep better at night and that’s something she values above faster debt repayment, then that’s the right decision for her.
The strength of a values-based money system is that it is personalized to your needs and your values through the application of a simple framework. There is no “should” in my system.
Budgeting moves the focus from your goals to a dwindling balance
One of the biggest challenges with budgeting, and likely one of the reasons so many people give up on it, is that it fosters a scarcity mentality. Here’s how that shakes out:
You start with your monthly income and you plan out all your spending until you get down to zero.
You pay your mortgage or rent; now you’re left with less money.
You allot a certain amount for your car and bus pass; now you have less money still.
With every additional entry, you’re dealing with a dwindling balance.
Do you see where the emphasis is? It’s on what doesn’t fit in the budget.
In her article entitled The Annoying Psychology of Why You Can’t Stick to a Budget, personal finance writer Kristin Wong points to the work of Brad Klontz, a psychologist and certified financial planner in this domain. Klontz likens budgeting to being on a diet.
And we all know how much fun and effective diets are.
As Klontz says, “Your emotional brain responds to the word “budget” the same way it responds to the word “diet”. The connotation is deprivation, suffering, agony, and depression.”
You end up fixating not on what you want and what you’re working towards, but rather on what you can’t have.
What’s the result? A dose of scarcity mentality and a temptation to overspend.
With a values-based approach, your focus is squarely on what inspires you and matters most.
There is a constant emphasis on making conscious, intentional choices that are congruent with your values and goals.
Two of the main questions that pop up over and over again are, “Do I really value this? Will it get me closer to, or farther away from, my goals?”
You don’t need a spreadsheet to answer those questions.
My values-based money system guides you simply and unfailingly through the process of creating the kind of life that lights you up!
That, in a nutshell, is why this system is so much more effective and easier to maintain than one based on budgeting.
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*Not her real name