We’ve constantly heard from our parents or peers “you need to budget”. But what does it actually mean to budget? What are the benefits of personal budgeting? How will it help you?
Believe it or not, budgeting is very important, and it can be a tremendously helpful factor in the accomplishment of your goals. Whether it’s to budget for the month’s expenses, for an upcoming trip/vacation, or a long-term goal, budgeting will help you accomplish it in just the right amount of time.
What is a budget?
So first let’s start off with the basics, what is a budget?
Very simple! A budget is a predetermined plan that explains how income will be used for a certain period of time. It can be made from scratch on a piece of paper, a spreadsheet, or on apps and online templates. I personally recommend making your own budget because your life as an individual is unique and your budget has to fit your own life.
Some budgets are for the long-term and some budgets are for the short-term, some are followed for several years, some for decades, simply because they get the goals accomplished.
What are the benefits of a budget?
There’s a quote that says: “If you fail to plan, you plan to fail“. The importance of this quote fully applies to your readiness to comply with your financial responsibilities. No matter what your ultimate goal is: retiring early, retiring at all, building a business, not worrying about not being able to afford something, budgeting now is the first step to getting there.
The importance of tracking your money is immensely undervalued by the general public and that’s why so many people in America can’t do what they want in life. A Gallup poll found that only about 32% of Americans maintain a household budget. This is only 1/3 of the population. The results should at least be 2/3, and to me, even that’s not acceptable.
Some of the benefits of personal budgeting:
- Makes you decide in advance how your money will work for you
- Shows you where you spend, overspend, and where you can make cuts in order to save more
- Gives you control over your money
- Enables you to save for expected and unexpected expenditures
- Stops you from overspending (if you let it!)
- Helps you figure out a plan to have your Finances fit your goals in order to reach them in a timely manner
- Enables you to produce MORE money because now you have a designated amount that will be INVESTED instead of being spent
- Provides you with a warning to potential upcoming problems
These are only some of the benefits of budgeting, listing out all the benefits of budgeting would be nearly endless because there are really so many pros to budgeting, these are simply the one’s I’ve particularly noticed in my life and the one’s that many millionaires talk about.
One characteristic that all wealthy people have in common is that they keep track of their money, and therefore, spend below their means. Any person who is beginning their journey to live a life of financial freedom and independence needs to first figure out how their money moves. Once they figure this out, they can take control of their money in order to have it work for them instead of them working for it.
80% percent of current millionaires are self-made millionaires (some of them billionaires), tracking their money was one of the first steps they took to be where they are today.
Find yourself in one (or more) of these positions?
When you build a budget, you want to shift your mentality before doing anything else. Your past mentality is what put you in the position of not tracking your money in the first place. So this needs to be the first step to tracking your money.
What type of people need to shift their mentality?
- The higher earner: “I earn a big salary, I can afford x, y, and z. It doesn’t matter what I spend because I make enough”
- The person who is afraid of missing out: “Everyone else has it and don’t worry about money, I must have it too”
- A person with limited time: “I don’t have time to dedicate to my finances”
- The procrastinator: “I’ll buy it now and pay for it later”
- A person who wants immediate pleasure: “I don’t care about money, what matters is that it gets me what I want now.” or “I really want this product (even though I don’t need it) I’m going to buy it anyway because it would be nice to have”
- Person living paycheck to paycheck: This person spends all or most of their money as soon as they get their first paycheck. By the time their next paycheck comes along, they either have very little money or none at all.
- The person who goes and/or eats out: This is the person who likes to go out every single weekend regardless of the money or the person who always eats out or has to buy a coffee every morning.
You as an individual might fit into one or more of these categories, in order to start with your money-tracking process, you need to change all of these mentalities first. Think for the long-term, not the short-term. Learn to delay gratification so that later you can have more than you could ever get today.
By investing a significant amount of money, you enable yourself to have a passive flow of income that you don’t need to work for every single day of your life. All you need to do is stay disciplined now and learn to delay gratification.
How do you start a budget?
Once you change your mentality, the key to a budget is to understand your priorities.
Ask yourself the following questions:
- What are my necessities?
- What are my ‘wants’ vs my ‘needs’?
- Do I have any current or future savings goals?
- How much will I need in retirement?
- How much of my money can go into investments?
- What’s my income?
These are all questions that one must ask when building a budget. Once you have a clear understanding of your individual priorities, you need to make a plan.
When making this plan, you must keep one very simple formula in mind: income > expenditures
If this very simple formula is not being followed when you build your budget, you will encounter a lot of pain along the way. It may seem like a very simple formula, but you’d be surprised at the number of people who don’t even realize that they don’t follow it.
And by the way, no, a credit card or a loan does NOT count as income. So avoid adding that to your income because it’s something that must be paid back, not something that you earn.
If you don’t have a lot of income, find a way to build more income. Start a side-hustle, work a second job, learn new skills to get a better job or a promotion. These are all options you can take as an individual to make more money if your main struggle is not having enough for your necessities.
The way in which you build a budget can vary depending on your individual life as well as what you’re using to write your budget. But no matter what, you need to write it down! This can be electronic like a spreadsheet, on a budgeting app, or with a simple pen and paper.
As long as you get it written down somewhere, it will be a tremendous help for you. Why? Because when you have it written down, you are much more likely to follow it.
When you try to keep it all in your head, it’s too easy to lose track of your income, expenditures, savings, investments, etc. This is why you HAVE TO write it down!
Now, how do you write this down? What do you do to start it? The idea is simply listing all the possible expenditures that you will encounter in a given time frame (typically a month,). Write down your income, those expected expenditures, those savings goals, and how much you will be spending on those expenses.
You list a projected amount of what you expect to spend and then as the month passes, you list what you actually spent next to the projected expenses. Make sure actual expenses don’t go over your projected expenses.
Your expected expenses and savings should all be in sync with your goals.
The idea is to simply prioritize your expenditures correctly, know how much you have to save for short or long term goals, and include those savings in your budget. List out what you expect to save & spend, then list out your actual transactions and savings.
Now you’re tracking your money and tracking the distance to your goals! The simple fact that you now have track of all your income, savings, and expenditures, puts you that much closer to your goals. Goals that you might’ve not even reached if you never tracked your money in the first place.
To finalize everything and give you all an illustration of what I explained above, I’ve also listed the steps to take and included an image as an example.
Steps to take:
- Shift your mentality
- Write down your expenses in order of priority
- Separate the “needs” and “wants”
- List your savings and investment goals
- Write down what you project to earn, save, and spend for the month (or other given time frame)
- As the month passes, add each of your expenditures
- Put them into their designated section. For example, an expense at Advanced Auto Parts will add to the value in the ‘Repairs/Maintenance’ section on the right side of your budget in the example below:
I’ve also included a template of a budget on a spreadsheet for everyone to view. You can make a copy of this template for your own use by doing the following after you click this link:
- Click on “File” on the top left corner of the spreadsheet
- Click on “Make a Copy”
- Name your copy of your template
- Click “OK”
Now you have your very own copy!
On this template, the formulas are all ready for you to only list your individual income, savings, and expenses into the blank sections of the sheet. The individual listings you add on any of the blank sections will automatically add into the correct section on the “ACTUAL” side of the “EXPENSES”, “INCOME”, and “SAVINGS/INVESTMENTS” sections.
On the “PROJECTED” side of your budget, you can add your own projected expenses, savings, and income. Everything has been color-coded for it to be more easily understood.
If you have any questions about the budget template or anything else please feel more than welcomed to ask.
Remember that in order to accomplish your financial goals you need to start TODAY. Don’t leave off for next week, next month, or next year… Start TODAY.