In Luke 14:28-30, Jesus gives an illustration of an individual who wants to build a tower. His simple story is very fitting to personal financial management:
For which of you, desiring to build a tower, does not first sit down and count the cost, whether he has enough to complete it? Otherwise, when he has laid a foundation and is not able to finish, all who see it begin to mock him, saying, “This man began to build and was not able to finish.”
To summarize Christ’s point very succinctly: You must have a plan! Not having a plan is planning to fail. So in this part of our series on personal finance, we want to take a look at how to make appropriate plans with our money—also known as budgeting.
3 Types of Plans
There are three general types of plans or budgets for our money:
- Life Event Plans
- Savings Plans
- Monthly Spending Plan
For more detailed information on the nuts and bolts, you can check out our in-depth article about this very process called: Budgeting For Maximum Savings over at our blog. In this article here, we will cover the overview and general concepts.
1. Life Event Plans
Life Event Plans are budgets associated with specific things or events. Things like home renovations, weddings, college bills, family vacations, or major purchases would fall under this category. This type of budget is probably the most analogous to Christ’s example of constructing the tower.
A Life Event Plan’s function is simply to help us know how much we need to spend on something before it’s too late! It will help prevent us from being scoffed at for not being able to finish, or more likely, keeps us from needing to borrow money to accomplish it.
For example, the average American wedding in 2012 cost nearly $30,000, excluding the honeymoon! For many of these high-cost weddings, having a feasible wedding budget (Life Event Plan) would go a long way to helping the marriage get started on a solid financial footing while also helping out the bride’s poor dad!
While each specific situation may need to be planned for differently, there are always a few basic questions to ask. And these questions will lead directly into our next category of plans.
- How much will it cost?
- When will I need this money?
- How much will I need to start saving now?
Let’s be frank, if we discover that what we want is not at a reasonable cost, we should be willing to adjust our wants. We shouldn’t allow the availability of debt to sway us from exercising self-discipline! Once we determine the amount needed along with the timeframe within which we will need the funds, that information moves us to the Savings Plans.
2. Savings Plans
Savings Plans are simply lists of savings goals. The Savings Plans should be made up of things from our Life Event Plans along with anything else that we need to save up for.
Savings Plans should list the amounts of each item we are saving for, when we need them by, and how much we need to save monthly. They should form the roadmap of how to get from where we are to where we can afford the things we need in the future, without resorting to debt.
Long-term vs. Short-term
Savings Plans can be divided into two subcategories: Long-term and Short-term. The following table summarizes the differences between the two:
|Long-term Savings||Short-term Savings|
|Duration||Longer than 5 Years||5 Years and under|
|Funds Placed In||Higher-yielding investments||Low-risk savings accounts|
|Examples||Retirement, College savings, Home mortgage, etc.||Credit card debt, family vacation, Christmas gifts, school bill, etc.|
Savings Before Spending
Our Savings Plans then inform us as we manage our Monthly Spending Plan, which is what most people commonly refer to as “the budget”. By this point you might be wondering why we’ve put the Spending Plan so far down the list. This is because we think slightly differently about the spending budget than most people.
Budgets are typically used as a tool to control spending. However, we believe that budgets should actually be tools to help us accomplish our goals, and just as importantly, to accomplish those goals without debt. To put it another way, we believe that budgets shouldn’t just stop at controlling our spending, but should serve to maximize our saving. There is a world of difference between these two approaches to budgeting.
If we see our budget as simply a way to control our spending, it is like saying that our goal for a construction project is to avoid running out of money, when rather it should be the erecting of a tower. The former is simply a prerequisite to accomplishing the latter. It should be the same with our life goals. Using a budget to help us reach our goals requires us to start with the end in mind, and setting our target for what we are seeking to attain, instead of being simply a mechanism to restrict what we can’t do.
Besides, it’s far more motivating to focus on our goals rather than focusing on what we’re restricted from doing.
3. Monthly Spending Plan
So by the time we start crafting our Monthly Spending Plan, we should have a clear idea of how much we will need to save each month to reach our goals. This then helps us have concrete parameters around which to fit our spending.
In most budgeting guides, we are given recommended percentages for each category of expenses. For instance, “Housing” expenses generally are recommended to be in the 25-30% range of the household income. It gives the impression that that’s what we should be spending on housing, when it shouldn’t prevent us from striving to decrease that figure as far below that range as possible.
As a practical example in our home, we not only pay $0 per month for our electricity, the power company pay us, because we’ve invested in solar panels. Obviously this isn’t a solution available to everyone, but it’s one example of how it’s possible to color outside the lines of typical budgetary guidelines.
The interaction between the Savings Plan and the Monthly Spending Plan is important. The Savings Plan helps us know how much surplus we need to save each month after our expenses in order to achieve our goals. Our Monthly Spending Plan also tells us whether we are realistic in our Savings Goals as well. The interplay between these two categories of plans forms the primary point of management in our month-to-month financial planning.
The Big Picture
We’ve discussed how having a plan with our money is important, and have broken the process down into 3 general categories of plans. Here’s a graphic that illustrates the relationship between them:
Life Event Plans are those big things in our lives that we need to pay for. Those items make up our overarching Savings Plan, which really can be thought of as a snapshot of the values and priorities in our lives, then those saving goals inform our monthly spending habits as encapsulated in our Monthly Spending Plan. Finally, the surplus from our income above our monthly expenses then filter back to start moving us toward the goals in our Savings Plans.
This arrangement helps keep the goals in mind and gives us a specific place to apply any extra money we receive, like gifts or bonuses from work. It’s a great way to prevent our money from being mindlessly spent away.
This was a rapid overview of a process to help “count the cost” as Jesus recommended. It may be tweaked and modified to fit your specific needs, but if you would like a more thorough explanation of this process along with example plans and numbers to look at, please visit our article, “How to Budget for Maximum Savings.”
What Are We Saving For?
At the conclusion of this article, I think it’s important to highlight the question of “For what?”
In looking over all that’s been stated, it may seem daunting and a lot of hard work. It’s tempting to think that it’s not worth the trouble. So why stress the importance of saving so much? What’s it all for?
As described in our very first article in this series, we save for future needs or wants, and we save in order to have money to give away. But I believe there’s something even more compelling to save for: freedom.
- Freedom from slavery to the lenders.
- Freedom from the stress of living paycheck to paycheck.
- Freedom from being dependent on a job we detest just to pay the bills.
- Freedom from being wiped out with a financial emergency.
But most importantly of all: Freedom to give and to serve the Lord with all we have.
Let’s listen to Jesus, let’s count the cost, let’s build the tower—and finish it!
 All Biblical references are from the King James Version.