In 2014 my wife and I started to become intentional with our money. We started realizing that the only way for us to build wealth was to know where our money was going and to have a plan for it. Once we became intentional with our money it caused us to make different lifestyle decisions, and it caused us to prioritize saving and investing. Before this, building wealth was not something that was going to happen for us unless it happened accidentally. Now it is something that we deliberately do.
Even though we are very intentional with our money, that doesn’t mean we don’t have fun. If something comes up that we want to be involved with, like a vacation to our parents, then we take that trip. We save for these trips ahead of time, so we have the money on hand to pay for them. There is a fancy word for all of this: “Budgeting”. Ok, it’s not that fancy, but budgeting helps you build wealth.
When you have a written budget each month you know where your money is going. Your money is going to your priorities. If saving is not your priority, you will not save. List all your expenses in order from what you spend the most money on to the least. This is most likely your priorities in your life. Where does your saving rank? If your vehicle payments or your restaurant category or your cable bill are more than the amount you save each month, then you will most likely never be wealthy. Your savings needs to be where most of your money is going each month if you want to build wealth. If your house is your top priority, you most likely are giving too much of your money away to interest. Building wealth will be a struggle for you.
What If…? Scenarios
You get rich with budgeting because you become intentional with your money. When you have your expenses laid out in front of you for each month you know where your money is going. You can determine if you want those things or if you want to be wealthy. You can do “What if…?” scenarios. What if you stop spending money on this and this or that and invest that money, how much could you have in 10 years? Or how much can you have in 20 years?
Learn to use a simple investment calculator like the one from www.investor.gov:
Start with one of your budget items that maybe you could live without, like half of your restaurant or your cable. Maybe that’s $100 a month, or maybe that’s $300 a month. Plug the numbers into an investment calculator to see how much you could have by investing $300 a month for 10 or 20 years. It’s $60,000 in 10 years and $225,000 in 20 years! (This assumes a 10% rate of return) After that, pretend you could live without cable and without eating at restaurants. Put those numbers into the retirement calculator, and how much will you have after 20 years? What else can you cut? Try a few different “What if’s”. The last thing to do is to see if you can raise your income. What if you brought home an additional $1,000 a month and invested that over 20 years? $750,000 is what you could have!
Use Your Budget to Get Out of Debt
By setting up a monthly budget each month you can determine how much money you can save and invest. Some of you are so far in debt that you need to make some drastic changes to your budget right now. You have no choice but to give up most of your wants: cable, restaurants, subscription services, the extremely out of whack cell phone plan, and the house payment that’s killing you. You need to use your budget to help plan a way to get out of debt. After you’re out of debt you can continue to use your budget to get wealthy.
In the next post, I will go over what Zero-Based Budgeting is all about, so you have a guide for budgeting.