A simple budget is the first step on your path to financial freedom. Your budget should make sense and be easy to follow. Do you know where you’re spending your money?
Building your wealth
How much you get paid every year is not a measure of your wealth. The number you need to concentrate on is the difference between what you make and what you spend. You’ll never know this number without a budget. I call it your wealth potential. Maximize your wealth potential and you’re well on your way to financial freedom.
Sounds simple enough but most people don’t follow a budget and have no idea how they spend their money every month. With every promotion and pay raise comes more expensive toys, flashy new cars, more and more stuff. These things may make you feel rich but in reality they’re keeping you in the poor house. There’s a simple rule you need to follow no matter how much money you make:
“Live within your means. Spend less money than you make.”
Think about your personal finances like a business. The success of a business is measured in how much profit they make. Profit is what’s left over after all the expenses are paid. Would you want to own a convenience store where your monthly rent was consistently higher than your sales for the month? You’d be out of business quickly. You might think someone earning $200,000 a year is rich but if they spend all of it on expensive cars, meals, vacations, and rent they have no wealth potential. They’ll be broke the minute their high-paying job dries up. We’ve all heard stories of celebrities who have blown through their money and hit rock bottom after making millions.
How do you break this vicious cycle? You need to create a simple budget and follow it. You don’t need a complicated system listing every possible category you spend money on. Make a simple plan and follow it. Grab a sheet of paper or a spreadsheet and list out your monthly expenses. If you need some automation try out Mint.com and use their budgeting tools online or their phone app.
Simple budgets use percentages
Your budget categories should be a percentage of your income. Strive to spend no more than 50% of your income on all your expenses (rent, food, car payments, utilities, entertainment). It’s not feasible for all of us to live on Airman Basic pay but who says you have to blow through all of your promotion and bonus money? By making your budget a percentage of your income, your living costs can only increase as a fraction of your income.
If you don’t have a budget, start one. If you have one now is a good time for a tune up. If you’ve started a money log you’ve learned some lessons on how you spend. What expenses are taking up the biggest chunk of your budget? What can you do to keep your budget under control?