One of the most useful techniques for planning ahead with your money is what I call the ‘As If’ Principle. It is a really simple technique that clearly identifies in advance whether a specific goal is achievable, while at the same time, helping you achieve it! The time to use this technique is when you have a future goal which has the effect of either reducing your income or increasing your expenses on an ongoing basis. Examples of such goals are:
- Choosing to retire or work less
- Sending your children to a private school
- Preparing for possible redundancy
- Planning to take parental leave
- Moving from full time to part time work
- Taking a job with less stress and less pay
- Giving up your job to study at university
- Buying your first house
- Buying a bigger house with a bigger mortgage
- Borrowing to buy a car
Here is how it works, and it really is simple!
Step One: Prepare a new budget for yourself, ‘as if’ you are already taking your planned action; that is, a budget based on less income or increased expenses.
Step Two: Start living according to your new budget ‘as if’ you are already in your goal situation.
Step Three: Save the difference between your current and planned income or current and planned expenses into a savings account.
This allows you to test your ability to achieve your goal, while adding to your savings. The more time you have to plan ahead, the easier it will be to test your budget, increase your savings and achieve your goal. If you find you are unable to live on your new budget without dipping into your savings, review the cost or timing of your goal and whether it is achievable.