How To Set Up Your Finances To Create Your Dream Lifestyle

Dreams remain dreams until you do something about it, so it serves you well to remember you are in the driver's seat of your life. 

There is no ideal dream lifestyle, which means the definition of lifestyle is relative, consequently giving everyone the permission to desire and pursue different things in life. So, whether that’s owning a couple of cars, buying a home, travelling, contributing to charities, buying a business, or investing in your health – dream big and be smart about it. 

After you make the decision to pursue your dream lifestyle, it's time to get a picture of what your dream lifestyle would look like and how to start by being “money smart”. 

How? Use a budget to map out how your money will work for you before spending any of it.

A budget can help you identify your financial wants and needs before you embark on these four steps to creating a budget to help you attain your ideal lifestyle.

Step 1: Understand Your Income 

When it comes to picturing and planning for your ideal lifestyle: your dream lifestyle starts with how much you have.

To kickstart, self-evaluate yourself and answer the question, “Am I overestimating my income?"

Be honest and you'll easily identify how to allocate your income in your monthly budget planning. Additionally, you gain an understanding of how to budget for extra income.

As an initial step, consider how much you earn and your current income status (including all additional income sources other than your monthly salary). Examples of such extra income sources include tax refunds, spousal support, receiving incentives, lottery winnings, rental income - to name a few.

Word-Of-Advice: If your income is irregular, set the lowest amount you’ve earned (or) your lowest earning total as your budget base amount. Consequently, you avoid setting unrealistic goals by overestimating what lifestyle your income can genuinely sustain.

Step 2: Track & Record All Expenses

If you're earning, You're spending.

How much you earn and spend matters, so tracking your expenses is an effective way to understand where your money is going. 

On the flip side, however, the reality is that budgeting can feel overwhelming and it isn't surprising that the idea of tracking every single transaction can be daunting. 

There are free, comprehensive digital options to help you track your expenses 24/7 from any e-transaction, cheque, cash, mobile, and credit/debit card transaction. If you prefer the time-honoured approach of writing or using an excel spreadsheet: it's just as effective, so long as you're using accurate information.  

Word-Of-Advice: More often than not, tracking expenses for a minimum of 2-3 months can give you a detailed look into your money habits like savings, bill payments, debts, donations, earnings, and so on. 

To gain more information on expense tracking, click this link for insight into lifestyle inflation.

Step 3: Categorise Expenses Based On Needs & Wants

All money-related choices involve a “want versus need” consideration. 

Inevitably, how you go about determining needs and wants impacts if you will or will not successfully attain your goals.

Next, divide expenses into two main categories:-

1. Non-essential expenses (a.k.a. wants)

These are often costs incurred for leisure or to improve your lifestyle, such as buying a new outfit, a new phone, dining out with friends. Based on how financially disciplined you are, non-essential expenses can positively or negatively affect your lifestyle.

Word-Of-Advice: Non-essential expenses are optional and can easily exceed your budget, for instance, when you overspend on your household budget.

2. Essential Expenses (a.k.a. needs)

These expenses may be sub-categorised into:-

• Fixed Essential Expenses. 

The good news is that these expenses are often consistent. 

Some examples of fixed essential expenses are rent, school fees, insurance premiums, loan installments, nanny/babysitting/maid service help, or any other domestic help service.

• Variable Essential Expenses

These are necessary and often vary in cost depending on how much you consume. 

On the upside, you can adjust variable essential expenses to suit your lifestyle changes. For a win-win result, practise moderation in regards to your consumption to regulate these expenses: examples include fuel expenses, electricity, WIFI bills, and groceries.

Here's a real-life example - you can use energy-saving bulbs and appliances to lower your electric bill and avoid compromising your budget (and consequently) the quality of your lifestyle. 

Word-Of-Advice: There's a shopper's hack with a 50/50 successful rate to try, and I can confirm it did help at a time when I wanted to upgrade a home appliance. The shoppers hack’ to try is; when you see something you want to buy, step back and hold off for a week. If you still feel the need to buy it after the week passes, go ahead and buy it (it's more likely to be a meaningful purchase).

Step 4: Outline S.M.A.R.T Goals

"First the dream; then the plans, before you can take any meaningful action." 

Once you’re clear on what you have and want, financially it gets easier to be practical and decisive about your plan of action before taking any action.

The last but not least step for you to undertake is to create S.M.A.R.T financial goals to avoid chasing a fool’s paradise that can never be a reality.

Do yourself a favour by remembering there are no "one-size-fits-all" budgets or lifestyle choices. So, here's how to navigate Step 4.

How To Make S.M.A.R.T Money Moves

To be goal specific' is to give your objectives an identity or function, that contributes toward achieving your dream lifestyle. 

Case in point - don't set a vague goal like "saving money". 

Go into detail about what you're saving for, for example, "saving Ksh800 per month for a new phone to upgrade my vlog as a side-hustle, saving Ksh10000 for a home downpayment, and so on". 

Once you identify your goals, the next practical step is determining how much money to set aside to achieve each goal. Remember to pace yourself and don’t make unrealistic goals; this will only work to discourage and distract you. 

• Case in point, if you were thinking of putting a down payment to upgrade your phone in a month when you can barely save Ksh2000 - Ksh3000 monthly, think twice. 

Consequently, in such an instance, this goal would be unachievable in the given timeframe, so you have to readjust your timeline to set a realistic amount to save.

Once you’ve planned for what’s probable, be prudent and cover your bases concerning the unanticipated. This way, you stay ahead of possible catch-22s, such as urgent home repairs, health emergencies, inflation just to list a few.

The final consideration of the S.M.A.R.T process is to be timely. This refers to setting timelines for each goal or all goals combined, based on your desired lifestyle. 

• Say you want to own a car by the time you're 35 years old; consider the expert-recommended 20/4/10 rule for purchasing a vehicle. This ratio recommendation helps you determine and budget for the right car. Essentially, this recommendation translates to a 20% down payment on a car with a four-year car loan, set aside less than or exactly 10% of your monthly income on transport expenses.

Word-Of-Advice: Remember this rule isn’t a bulletproof plan for all car-buying decisions, so working with a financial expert is always a good idea. 

Secondly, if you have a poor credit score, be cautious about extending your car loan beyond four years because you'd pay more in interest - as time goes by.

Bottom Line: Act In Your Best Interest 

A “simple” lifestyle, maybe an extravagant one to another. 

Whatever your preference it doesn’t matter what your definition is, but it does take hard work, time, patience, and determination.

Keep in mind it isn’t about what other people are doing; it's about how you can live your dream lifestyle.