When completing your very first budget you will either find that it is incredibly easy or unbelievably challenging, unfortunately, it is most likely the latter. This is because society has trained us to spend more than we make, we can get 5 years same as cash or just put it on a credit card and pay it off later.
Secret of the Wealthy
Let me tell you the secret of the wealthy. If you were to survey every millionaire in America you would find that they all have one thing in common. Each one of them maintains a budget of their money and they always ensure their expenses are less than their income.
Marketing geniuses have taught us to want things and society has trained us to purchase items we cannot even afford. This is a very troubling path to go down and leads you to complete disappointment. You spend your entire life “keeping up with the Jones'” and in the end you lose. You never are able to retire or live out your dreams. All because you break the single rule all rich people follow, your expenses must be less than your income.
Now that you know the big secret of the wealthy, let’s begin. First you need to calculate how much you make each month in take home pay, or how much money you actually have to spend. If your salary is variable, like my wife’s, take a 2 month average and use that as the base. If your salary is fixed just add up how much was deposited into your bank account last month.
Next you need to determine your expenses. Some expenses you immediately know such as your mortgage/rent, cable, and internet. For these go ahead and add them in as a line item on your budgeting sheet (Need one, download mine). Many of your expenses are variable such as electric, fuel, and groceries. For these take an average for the last 6 months and add each one as a line item on your budget. If you have any bills that are due only certain months of the year such as auto insurance or your taxes then divide the total due by the number of months until it is due and add that as a line on your budget. Finally, take any debts you have and add the minimum payment for each item as a line on your budgeting worksheet.
Let’s do the Math
Now take a step back and subtract your total expenses from your total income. Are you positive or negative? If you are in the positive then congratulations, especially if you are significantly in the positive. This means you have additional money to throw at your debt or your financial goals.
If you are in the negative then it is time to make some adjustments. Do you really need cable? What if you switched to an alternative streaming service? Do you need 100 mbps internet? Do you really need to eat out twice per week? I know it is tough to give up certain luxuries but remember the more you give up the quicker you can rid yourself of your debt. However, I encourage you to leave certain amenities in your budget if your debt is of great amount ($60,000+). The reason for this is, just like in dieting if you give up everything you are less likely to stay on the plan.
At this point your expenses should be less than your income. Now look again at your budget. What are you able to drop off your budget while still enjoying your financial freedom journey and be able to pay off more than the minimum payment of your debt? Are you able to switch to carpooling to save gas and tolls, would you survive on eating out only twice a month instead of twice a week, what about switching to generic food? These are decisions you need to make, however, the harder you think, the more out of the box thinking you have, the sooner you will be able to pay off your debt.
Finances are a Partnership
Finances are one of biggest reasons for divorce in this country. Therefore, I cannot emphasize enough if you have a significant other it is important to include them in all of your budgeting decisions. I would encourage you to review and discuss your budget every month so everyone is on the same page. Then every four months I would recalculate your entire budget from scratch, this allows you to see things in a whole new light and you might be able to decrease or completely eliminate some new expenses.
Your Financial Freedom Partner,