Because you can’t experience financial freedom until you operate under the constraint of a budget. Sticking to a budget, personally and professionally, forces us to make thoughtful choices about what we want and need. Smart people only have to face that insurmountable pile of bills once before getting their act together, starting with a thorough reckoning as to where their money is going. They realize that once you understand how much you’re spending and what you’re spending it on, the right choices become clear. A morning latte is a lot less tempting when you’re aware of the cost: $1,000 on average per year. Having a budget isn’t only about making sure that you have enough to pay the bills; smart people know that making and sticking to a strict budget means never having to pass up an opportunity because they’ve blown their precious capital on discretionary expenditures. Budgets establish discipline, and discipline is the foundation of quality work.
The 3 Things EVERY Budget Needs to Have:
- Purpose: A budget should have a purpose or defined goal that is achieved within a certain time period. Knowing the source and amount of income and the amounts allocated to expense events are as important as when those cash flow events occur.
- Simplicity: The more complicated the budgeting process is, the less likely a person is to keep up with it. The purpose of a personal budget is to identify where income and expenditure is present in the common household; it is not to identify each individual purchase ahead of time. How simplicity is defined with regards to the use of budgeting categories varies from family to family, but many small purchases can generally be lumped into one category (Car, Household items, etc.).
- Flexibility: The budgeting process is designed to be flexible; the consumer should have an expectation that a budget will change from month to month, and will require monthly review. Cost overruns in one category of a budget should in the next month be accounted for or prevented. For example, if a family spends $40 more than they planned on food in spite of their best efforts, next month's budget should reflect an approximate $40 increase and corresponding decrease in other parts of the budget.
"Busting the budget" is a common pitfall in personal budgeting; frequently busting the budget can allow consumers to fall into pre-budgeting spending habits. Anticipating budget-busting events (and under spending in other categories), and modifying the budget accordingly, allows consumers a level of flexibility with their incomes and expenses.
Creating a Budget Action Plan
Everybody needs a plan when it comes down to budgeting. What we've found is that when it comes down to budgeting, most people simply take the amount they bring home and start subtracting out their bills with the hope that there's something left when they're through. This 'pay yourself last' system just doesn't work. Instead, use this handy piechart system to take control of your expenses and make sure that there's always something left (i.e. Savings) left for you.
So, what's the 'takeaway' from your Budget Action Plan? It's simple. Once you know how much you should be spending on your housing, your car, your day-to-day living expenses, and your debt based on your take home pay, you can start to figure out how much home you can afford and what type of car you can decide to drive. You can start to cut down on (but not necessarily eliminate) spending money on certain areas. This plan isn't about not being able to do things you love. It's about doing the things you love to do in moderation.
It's also about saving money on a regular basis to avoid living from paycheck to paycheck.
Budgeting can be BEAUTIFUL!