About 3 years ago, my wife and I sat down to create a new type of budget.
We’d always been good about tracking our expenses and had a standard budgeting method for stuff, but since we discovered the FIRE movement we decided to change things up a bit.
Actually, around that same time we also read the book Smart Couples Finish Rich. It included a bunch of worksheets and questionnaires to help us identify our priorities in life, and then create specific actions to make sure we’re spending money intentionally on things we truly value.
We now refer to this as our “value based budget.”
What Is a Value Based Budget?
Value based budgeting is the simple process of right-sizing your budget categories so that they better align with your priorities and values in life. It can also be called value based spending.
This means spending more money on the things that make your life richer and happier, and spending less money on things that don’t add true value to your life. If you do it correctly, you’ll feel much better about your money situation, where your money is going, and the lifestyle that you are living.
For example, one of the things that brings me and my wife joy is giving to others. This is a priority for us in life. And one of the things that doesn’t really provide us joy is eating at dine-in restaurants…
Years ago when we did traditional budgeting, we might have allocated $50 for a date night at a restaurant. This would be about $40 of food, and a $10 tip.
But now that we’ve got a values based budget, we might still spend $50 on a date night out… But $20 would be for food (2 x $10 burritos at a street meat stand) and a $30 tip to the guy who makes it.
In both budget cases, we spend the same amount of money – $50… But, working with a value based budget and having intentional spending, we walk away happier because we’ve fulfilled a higher priority activity for us → giving.
How to Figure Out Your Values
The biggest key to a values based budget is establishing your personal values and priorities in life. This is way harder than it sounds! It requires some deep questioning of yourself!
**Don’t be fooled into skipping this step… If your budget is based on someone else’s priorities (eg. what the Internet tells you to do, or tips from your extremely frugal friend) then you might be robbing yourself. The point is to match your spending habits to YOUR true joys in life.
Everyone has different values. To help figure out yours, answer some of these questions:
- Who do you admire most? Why? Generally, when we admire a quality in others, it’s something we value ourselves.
- What are some of your proudest moments? Why were you so proud? The feelings you identify here uncover true values in life.
- Picture the 70-year-old YOU. What are the most important things in that person’s life? This helps you determine what is most meaningful to you in the long term.
- If you were given only 48 hours to live, how would you spend your last few days? This is not a money question, this is a time question. It reveals who/what/where is most important to you.
- Have a look at this Core Values list. Which ones stand out most to you?
Now comes another hard part…
With your list of core values, try to prioritize them. Try and cut the list down to about 5 or 6 — the values that are absolutely most important to you. (Another thing you could do is group them into similar categories).
**A funny side note… My wife and I did this exercise separately and came out with slightly different lists. This is why it’s important to communicate and plan together as a couple. You need to make sure you are BOTH seeing value from your budget, so include what’s important to both of you.**
How to Merge Your Values With Your Budget
My wife and I went through every single category in our budget and questioned what we were getting the most value from vs. things we didn’t really feel great about. We allocated more money to some categories and shrunk the budget for others.
This is kind of like J$’s “challenge everything” he wrote about years ago. But, instead of focusing on money savings, the goal is to question the value you are getting from things.
For example, we increased our grocery budget from $500 per month to $600 per month. This was based on our personal value of community. My wife and I love to host parties and cook for large groups, and many of our best memories in the past 10 years have been centered around meals with others. We also increased our alcohol budget.
Spending MORE on stuff like this feels great! It gives us room to spring for fancy or expensive meats once in a while, or perhaps send our guests home with delicious leftovers. We can do this without having to worry about “spending too much money on food” because there is extra room in our budget for it.
In other areas, we decreased spending or removed expenses completely. One example of this was dumping Amazon Prime. We realized the value we got from a Prime subscription was very low. (Free/fast shipping is available from many retailers without a prime membership. TV streaming is a low priority for us, and so is buying books compared with borrowing from the library). Deleting our Amazon membership has saved us money while having zero effect on our happiness in life.
Other categories we decreased our spending in were restaurants, car costs, clothing, and insurance. Our goal is to reduce costs down to our happiness tipping point. If we can get the same amount of happiness for fewer dollars, that’s a win for us.
Values Change Over Time, and So Should Budgets
As we grow older and our lifestyle changes, so do our priorities in life. For this reason, value based budgeting isn’t a once-off activity. It’s more of an evolution.
As a home renter, I’ve never really prioritized home improvement or having nice furniture or appliances. Back in my 20’s, I couldn’t fathom spending $20-50k remodeling a kitchen or landscaping a backyard… But, as I grow older I’m realizing that my kitchen and backyard is where I spend 90% of my time. I would happily allocate larger amounts of money into these areas today, because I would reap more value from them.
It’s the same with health care and family/child costs. These will most likely increase in time as my wife and I prioritize them more.
I think values change as your wealth grows, too… When I was younger I placed a high value on savings and investments. It was extremely important for me to build wealth early in life — I am reaping life-long value from dollars I saved 20 years ago. But today, I have reduced the importance of wealth building and would rather prioritize travel and experiences.
Every person does it differently. I encourage you to make budgeting unique and custom to your life. Make it fun. Make it $exy! 😉
(And for those of you with no budget right now, here’s a bunch of free budget templates. Don’t forget to track all your spending via Mint or Personal Capital or YNAB!)
I’m curious… What do you spend money on that makes you happy? What budgeting tips do you use to get more value out of your money?
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Hi Joel, thanks for such a good read. I found that I had to shift my thoughts on budgets later in life. I was being too restrictive and not adding any fun to the process. So, when I wasn’t having fun and it was too restrictive, I just threw it out the window.
It wasn’t till later I found that part of life is finding those valued items or entertainment to make the journey worthwhile!
What do I spend my money on that makes me happy? Once a month I like to spoil myself to a nice bottle of rum or whisky, to sit down and relax with.
Rum/Whisky sounds so fun! That’s a cool thing to look forward to each month.
I think many people are a little negative about their budget or feel “guilty” all the time for messing up things. But we should remember that WE MAKE the budget… So we can put whatever reasonable things in there that bring us true joy. Glad you figured this out and enjoy the process more :)
We recently dumped Amazon prime as well. Turns out that you can survive without getting the items that you order the same or next day. I can’t wait to track how much money we save not only on the Prime subscription but the anticipated fewer impulse Amazon purchases.
Congrats! Good to hear.
When I had a Prime membership i felt an obligation to buy everything on Amazon… to make the most of my subscription. Turns out many other places offer cheap goods online, and usually fast/free shipping.
I’ve also noticed that even when I buy on Amazon and select 5 day shipping (or whatever is free) I usually get my stuff in 2 days anyway. If it’s in their warehouse, it’s in AMZ’s best interest to ship as fast as possible anyway. It’s not like they hold onto the order longer or use a slower shipping method… Most of my stuff comes faster and i don’t have to pay for it.
Price is what you pay and value is what you get. I’m slowly loosening the wallet a little bit and spending more on things without really caring or looking at the price tag and it’s been such a liberating feeling.
Value based budgeting sounds a lot like value based investing and those two are good ideas.
Glad to hear you’re letting loose a bit and enjoying the money you spend. I still look at price tags, but since there’s usually budget to spend – I spent it anyway! :)
If you’re not a budgeter, but do track and review spend every now and then, its a great exercise to line your spending up against your values.
Tracking your spending can lead to some great realizations! :)
Not sure I can tip someone $30 for $20 dinner. But I like your concept.
People did it to me when I was a server back in the day. I remember someone’s bill once was $100 one night, and they gave me a $100 tip on top when they paid. It absolutely changed my life.
It’s less about the money. More about paying it forward to others and changing their day. :)