A personal budget is the cornerstone of a financial plan and yet, amazingly, budgeting isn’t something they teach in school. The end result is a general misunderstanding about the purpose of a budget and an underestimation of its importance. Regardless of your income, the first step towards getting your financial life on track should by creating a meaningful budget aligned with your long-term goals.
Graduate Into Financial Freedom
People avoid budgeting for a wide variety of reasons. Some of the more common excuses include:
- Budgeting means being deprived and uncomfortable.
- I make enough money to pay my expenses so I don’t need a budget.
- This will take too much of my time to maintain. I have better things to do.
- I will lose the freedom to choose how I spend my money.
- I’m comfortable with my current spending habits.
- I would rather I not know how I spend my money.
In reality, overspending means going without. Budgeting means taking control and being able to live your financial dreams.
I once spoke to a woman with $2,000,000 of investments that couldn’t understand why I told her she couldn’t afford a $1,000,000 vacation home. In her mind, if she could pay for the thing in cash, she could clearly afford it. However, she didn’t have a budget that looked out to the future. She didn’t think about the taxes, maintenance, and insurance. She didn’t think about her other fixed expenses. She didn’t think about the opportunity cost of the home since the money she put in would no longer be able to generate the income necessary to help cover her expenses. Had she gone ahead with the purchase, she would have run out of money just like innumerable millionaire lottery winners, athletes, and celebrities that lacked a long-term plan.
Budgets Don’t Need to Be Complicated
When I work with clients, I never create an itemized budget. I simply tell them how much they need to save for each goal, set the savings on autopilot, and identify the fixed expenses. How they choose to divide the leftover cash is entirely up to them.
For savers that want to create a budget of their own, I recommend three basic steps.
Step 1: Track Spending
- Plan to track your expenses for at least three months (I recommend using our free wealth management tool)
- Remember to account for items that are billed quarterly or annually.
- Don’t ignore expenses that seem like a one-time emergency.
Step 2: Evaluate Spending
- Pay yourself first. Make sure your spending plan accounts for your savings goals.
- Remember to occur likely expenses that haven’t occurred in the past.
- (i.e. if your car has 200,000 miles, include probable repair costs.)
- If necessary, look for places to cut back.
Step 3: Staying on Track
- Create a plan that meets your goals
- Automate the deposits to your savings goals
- Convey the plan to your family
- Regularly evaluate your progress
- Update as needed.
Follow those steps and you will be well on your way to making all of your financial dreams come true.
Want to create a budget and aggregate your entire financial life?
Request free access to your personalized wealth managment portal and start planning your financial future, today.