Introduction
Ah, the monthly budget: the bread and butter of wealth building. At first glance, it may seem like a boring topic, maybe even an intimidating one. I assure you that budgeting is the easiest and most important step you can take to start growing your wealth. In this article, I will be going over the following steps to effective budgeting:
3 Easy Steps To Effective Budgeting
- Get started with free templates
- Develop a plan and spend intentionally
- Follow through on the plan you made for yourself
When I first started budgeting my money, I was pretty skeptical about its importance and effectiveness. “I know how much I spend on things!” I thought. I checked my bank account frequently, I didn’t spend aimlessly on designer clothes or restaurants I couldn’t afford, and I made sure my credit card bill was paid in full every month. I didn’t think budgeting would affect my life that much, if at all. Oh, how wrong and naive I was.
The power of a monthly budget comes from your intention to spend with a purpose. You are the one who decides how much you are going to spend in different areas of your life. If you are able to stick with your plan, frivolous and irresponsible spending is kept at a minimum.
Understand that if you truly want to grow your wealth, you must be intentional with your spending and budget your money. After creating my monthly budget for the first time, I was astonished at what I found. I might as well have had my employer send my paycheck directly to Postmates. The decision to make a budget has saved me thousands of dollars over the years. And the craziest part? Anyone can do it.
Step 1: Get Started With Free Budgeting Templates
The hardest part of mastering anything is getting started. Now that you have a supercomputer in your pocket, it’s easier than ever to create excuses for yourself and procrastinate. As you peruse social media or finish that last YouTube video, know that one of the most important tenets of building wealth is starting as soon as possible.
According to Investopedia, if you are able to save an extra $100 a month and invest it in the stock market at an average rate of return of 8% per year, 30 years of investing would give you $186,253.14. Compare that to having the invested amount of $36,000 (12 months a year * 30 years * $100) sit in a bank account, losing its value every day to inflation. You can’t make these gains unless you find extra money to invest.
There are tons of free budgeting templates online to help get you started. Open up a new web browser and Google “google sheets.” This is Google’s free spreadsheet program that will allow you to easily list and visualize your monthly expenses. Once you have the spreadsheet ready, list out your monthly income, followed by all of your expenses, subscriptions, memberships, etc. This includes all of your trips to Starbucks and late-night food deliveries. Do you have a monthly car payment? List it. Credit card bills? List them as well. See below for an example.
I want to emphasize the point that effective budgeting does not mean, “Look for ways to reduce your spending” even though that is a good idea! Effective budgeting is knowing exactly where every dollar of income is going every month, and that includes “Fun Money”. I don’t want you to give up all of the activities and outings that make you happy. I want you to actively choose what you spend your money on and how much of your hard-earned money goes to it.
If you’re looking for an app to help you with the budgeting process, Dave Ramsey, a personal finance guru, has a pretty nifty tool called EveryDollar that can help. I use the app myself and it’s helped tremendously. (Not an advertisement). There’s a free version as well as a paid version.
Step 2: Develop a Plan and Spend Intentionally
Once you have listed all of your monthly expenses, it’s time to create your monthly budget and decide how much money you’re going to spend on each line item in your budget. Some of the fixed expenses will be easy, like Netflix or a gym membership, but others will be more difficult. I don’t want to get into how much you should be spending on each line item just yet. For now, I want you to go through the exercise of giving yourself limits. See below for an example of what I mean.
Right off the bat, you’ll notice that the budget total equals zero. This is a key trait of an effective monthly budget. If your budget equals zero, that means every dollar of your monthly income has a job. Robert Kiyosaki, a famous American businessman, has a helpful analogy on this concept. Think of each dollar as a tiny green soldier that you send out on missions. Some missions require more soldiers, and other missions require less. Regardless of what mission they are on, each soldier needs a mission. The same is true for your income.
The next thing you probably noticed was the “Pay Yourself First” line item. Paying yourself first is a timeless personal finance strategy that methodically grows your savings over time. The effectiveness of this strategy stems from its understanding of human nature and temptation. It’s so effective, the US government uses it to take taxes out of your paycheck every two weeks.
When payday comes around, federal and state taxes are taken out of your paycheck before it’s deposited into your bank account. You probably aren’t even aware of how much is deducted every month. This is the power of paying yourself first. Imagine if you had to write a fat check to Uncle Sam every year. Many people would be unable to pay because they were tempted to buy things, rather than save.
Do not save what is left after spending, but spend what is left after saving.
– Warren Buffett
In order to harness the power of paying yourself first, take 10 percent out of your paycheck every two weeks and transfer it to a savings account. You might think 10 percent is a lot, but you would be surprised at how quickly you will find ways to pay your debts even though you have less cash to work with.
Now that you have your monthly budget drafted, what do the totals look like? Did you know that you were spending hundreds of dollars a month on eating out at restaurants? Or how about your credit card payment or student loan? If you didn’t have these payments, how much money would you have left every month? Marinate in these numbers. You will probably have an epiphany on how you can save a couple bucks every month. If you’re curious about how much you should be spending on some common line items, see below for a quick reference guide.
Rules of Thumb on Common Monthly Expenses
- Rent – 30% of your gross monthly income (before taxes).
- Groceries – Depending on where you live and how much you eat out, about $100-$150 per week per person in the household.
- Car Payment – As little as possible. Cars are depreciating assets that will devour your monthly cash flow. Pay for cars in cash whenever possible.
- Investing – As much as possible, or at least 10%-15% of your gross monthly income.
Step 3: Follow Your New Budget
The last and hardest step to budgeting your money is following through with the plan you created. It’s going to be difficult and tedious to keep track of whether or not you’re meeting your goals, but nothing worth striving for comes easy. After a few months of tracking and experimenting with your budget, you will get used to the totals you’ve created for yourself. You will be able to identify and feel how much extra you have left every month, leaving “fun money” as the only line item you’ll need to keep track of. In my experience, I’m more often than not surprised at how much money I get to spend on myself every month; especially when I come in under budget for a couple of months in a row and my fun money rolls over to the next month!
Conclusion
Budgeting isn’t about cutting fun out of your life. It’s about being intentional with how you spend your money so you can have fun AND grow your wealth. Stop procrastinating and set your life goals in motion. There are so many free tools on the internet to help you get a grasp on your finances. Using the guidelines above will give you a holistic view of where your money is going and set you up for a brighter future.
Remember, your life won’t change if you don’t stick to the guidelines you set for yourself. Once you become methodical with your spending, you will find yourself with more and more money every month. I hope this walkthrough was helpful. If you want to dive deeper into methods of growing wealth, sign up for our email list to get notified every time Riches & Reason posts a new article.
What are some of the things that surprised you in your expenses? What are you spending most of your money on? Let me know in the comments below!