It’s hard to save and pay off debt when you don’t know where your money is going. Most people and most couples do not budget consistently month over month. Budgeting is the foundation for building wealth. You need to know where your money is going and you need to be intentional with your money because if you don’t know where it’s going and you’re not intentional with it, it finds a way to go wherever it wants to.
You Need a Budget
The first step to building wealth is getting on a budget. There are all kinds of budgeting tools out there, and some are beneficial, but it’s going to come down to your personal choice. Which tool do you want to use? You need to find a tool that you want to use because that’s the only way you will stick to budgeting. The tools I like are everydollar.com and youneedabudget.com. These tools can connect to your financial institutions and automatically import your transactions, and these tools can have a monthly fee associated with them. You can use a pen and paper to budget each month, but there are better ways. You can also use spreadsheets, and some of the spreadsheet applications have really good budgeting templates. Find a tool that works for your situation.
No matter which tool you use you need to list the anticipated income that you will receive for the month, and then you need to list your anticipated expenses for the month. If your expenses are more than your income, you have a problem. You either have an out-of-control spending problem or you have an income problem. Either problem can be hard to fix. For some people, it’s harder to go get another job than it is to decrease their expenses, but for most people, it’s hard to cut expenses. Eventually, you will want your expenses to be at least 25% less than your income so you have money to attack your debt. If you cannot get your expenses down to that ratio of your income you will have a hard time paying off debt or building wealth. For some people, it will be hard to stop your overspending addictions in the first month, but you need to decide if you are going to continue down the same path you have been on or if you are going to try something different to better your financial situation. You can keep going on the path that you have been on, but you know how that’s been going for you. Some of you will need to work on increasing your income until you get to a ratio of income to expenses that works for you.
If you’re not current on your bills right now, then the first step for you is to become current on those bills. In order to get current on your bills, you might need to give up some things that you cannot afford, and you need to give up those things right now. One reason you think you can afford some things is that you are making monthly payments on them. This is another mindset and lifestyle change that you will need to make. In order to build wealth, you cannot keep thinking that just because you can afford the monthly payment that you can afford the purchase. Wealthy people don’t ask how much a month something cost; they ask how much. They don’t do this because they are wealthy; they did this and became wealthy.
When budgeting, not only do you need to list your monthly expenses for the month, you also need to keep in mind some of the bigger upcoming purchases that you will have. For instance, if you have a vacation coming up in 6 months you need to start saving for that vacation. This is where you need to start deciding if you want to keep going into debt when larger expenses come up or if you are going to plan ahead for these purchases so you can pay cash for them. Some other larger expenses that you can consider budgeting for each month include car insurance if it’s an annual or six-month premium, home maintenance, and vehicle maintenance.
During this first step, you also need to save $1,000 so you have a small emergency fund started. The small emergency fund will help you with some small, unforeseen emergencies that come up. Your friends calling you and asking you to join them for dinner at a restaurant is not an emergency.
Budgeting might take you two or three months to get good at it so don’t give up if you mess up the first month. Always remember that you are doing something different so don’t expect it to be perfect.
The first step of any financial plan is going to be your wanting to change. If you don’t want to change you will stay in the situation or the circumstances that you are in. Change is hard, but once you change a few things, some other changes become easier. Once you keep at your new, better lifestyle of budgeting and saving, other areas of life can become less stressful. Many people have already change their financial situation and are winning with money. You can do this, too!