In our digital age, there’s no excuse not to have a budget. There are all kinds of apps, planners, and calculators that take relatively little time to use. You can even use pencil and paper (which I’m actually a fan of; I need to be able to scratch out all my little notes and re-calculations in the margins). Everyone knows they should have a budget, but how many of you are actually doing this? And how many of you are then actually living your budget?
Let’s talk about why you need a budget. Everyone is interested in making passive income. Who doesn’t want to earn money in their sleep, or while they’re spending time with their family? But the truth is, if you do not already have your current financial house in order, making more money will not help you. Your healthy habits are what will carry you to financial success. In order to invest successfully, you need money to invest. Not only that, if you have terrible habits, you’re guaranteed to dip in before you hit the finish line.
Depending on your age, you don’t need a ton to start. But you do need some, and the more money you can put into your investments, the more money they will spit back at you, as discussed in How To Become A Killer Investor. In that free downloadable guide, I discuss how I built my nest egg by trimming $5 from my expenditures here or there, then putting that money to work.
Let’s be real. You could do it if you really wanted to.
Yes, that’s actually $2,106,593 total and $63,196 in annual passive income that is being flushed down the toilet in opportunity cost, because you aren’t tracking where your money goes. If you aren’t taking a hard, deep look at every little expenditure, you are not going to make it in this wealth building thing. Most people aren’t cut out for it, which is apparent if you take a quick look around. Wealth building is not a single act or series of acts. Wealth building is a calculated lifestyle, and it isn’t a lifestyle for everyone.
One of my favorite books, The Millionaire Next Door by Thomas J. Stanley, cites that nearly all self-made millionaires have a monthly and yearly budget. This is not a coincidence, nor is it an accident. In order to build wealth from scratch, you must:
- Live substantially below your means, and
- Put your excess money to work.
A big benefit of creating a good budget is simply awareness: being aware of how much your lifestyle and habits are costing you, being aware of where you’re wasting your money, and being aware of how much you actually need to survive (in many cases, this amount is far less than you think). Even if you plan a budget out and abandon it, it can be educational in this way. Abandoning your budget is not how wealth is built, however, and building wealth is why we’re all gathered here today.
While the image above is extreme, I made it to help you think in wealth-building terms: this $10 you’re spending is not just $10. It has the potential to become tens of thousands if you sweet talk it. But Alanya, you’re saying, you’re trying to suck all the joy from everyone’s life. Stop, you sound like my family. The point here is that you don’t have to cut everything. Keep the important things, which we’ll discuss more in the next post, Here’s Why You Can’t Save Any Money. Get rid of the stuff that isn’t important, and stash what you’re saving in your Roth IRA. This is what will make the enormous difference in your bottom line down the road.
Where many people fail in their budgeting, beyond not doing it at all, is making one so strict they can’t stick to it. Once they go off track, they file it in their mind as “Things I Tried But Stopped Because It Kept Me From Living My Life”, next to the kale diet. The trick to a successful budget is making it:
“The one step budget!” or “Simplify your budget now!” We’ve all seen these headlines. Simple has it’s strong points, but not for your budget. Life is not simple, therefore your budget needs to be detailed and all-inclusive or it simply does not work. Budget for everything. Maybe spending too much on clothes is a weakness for you, and you cracked down on yourself by eliminating them from your budget. Wrong. It’s illegal to be naked outside of your private residence, therefore, clothing is a Need. Also, if there is a dress code at your job or you have growing children, clothing is something that you need to buy when it’s time to buy it. I’d also argue that coffee is a Need, especially if you have the aforementioned children. Expensive clothing and Starbucks, however, are not Needs. Put them in your budget if you must, but trim your total spent.
The Bulletproof Budget will first help you prioritize your expenses and cut the ones that are weighing you down. Then, it puts your money immediately into your bank baskets when it comes in, so there’s no question as to whether you have enough for bills or how much you have for spending.
Being financially healthy doesn’t mean living a Spartan existence. If you’re living beyond your means and your spending is way out of control, you will certainly have to tailor your budget to reflect your income and make some lifestyle changes. However, if you’ve already prioritized, trimmed, and categorized and your expenses and you are a frazzled parent and you have a wine night with your girlfriends/poker with the guys once a month as your only getaway, you should continue to do that, if you can fit it into your Important Wants or Wants budget. I completely empathize. Can I come?
As a society, we’re programmed to take the path of least resistance in just about everything we do. It’s the reason our finances are a mess to begin with: buying lunch is easier than packing it and grocery shopping at Walmart is easier than going to 2 separate stores. By organizing your money into bank baskets and then setting up the bulk of your obligations to be paid automatically, it becomes more of a challenge to spend outside your budget than to simply maintain it.
Automation also gives you the benefit of making saving and investing a priority. You can have your money routed right into your savings and retirement accounts on payday. Out of reach and right to work is where I want my money.
Padding your accounts is the act of putting a bit extra into your bank baskets when you make your deposits. Automated and padded go hand-in-hand. If your budget is stretched too thin to pad your Automated Account, do not Automate your budget. You’re asking for unnecessary fees. I recommend going back to trim your bills further so that you can reap the benefits of automation.
Remember this: every $1 you don’t spend today has the potential to become so much more down the road. $10 invested on a monthly basis compounded at the same rate as above is…are you ready? Over 33 thousand dollars. That $10/month movie upgrade you ordered on your cable package (that really only has 3 good movies) pales in comparison to the wealth that can be created with a little organization, awareness and determination.