Budgets get a bad rap. Many people feel held down and restricted by a budget, but the reality is that a budget doesn’t hold you down – it gives you freedom! I’ll explain using a short object lesson.
What is a Budget?
A budget is nothing more than an estimate of how much money you’re going to make and spend within a time frame.
By that definition, everyone has a budget. You might not “prepare” a budget or think you’re following one, but EVERYONE has a budget. It’s defined by whatever cash and credit you have access to.
- Got unlimited cash and credit? Then you can buy whatever you want, whenever you want it with that kind of budget.
- Got zero cash and no credit? Sorry friend, you can’t buy squat on that budget.
Most of us are somewhere in between those two extreme examples. Our budgets come down to nothing more than second grade math where income – expenses = your budget.
It’s All About The Surplus
Hopefully you’ve got some money left over after you’ve subtracted your expenses from your income. If so, this is your surplus, and because a surplus is a very good thing, the bigger the better!
However, if you’re in the negative after subtracting your expenses from your income, then you’ve got a financial emergency on your hands. You’re spending more money than you earn, and you need to change that immediately.
Fixing Your Budget
There are only three ways to fix or improve your budget:
- Make more money
- Spend less money
- Some combination of make more money and spend less money
If you can’t seem to get ahead of your finances, then you either have too many expenses, not enough income, or both. Personal finance is simple. If you’re having trouble getting ahead then you just need to focus on earning more and spending less.
Do Budgets Work?
Dave Ramsey has a great quote that says “a budget is telling your money where to go instead of wondering where it went.”
Budgets work best when you have a plan and and you stick to you. When you stick to your budget, by spending less than you make, you prevent yourself from digging a financial hole for yourself.
When you don’t stick to your budget, by spending more than you make, you crash a burn by digging a financial hold that you’ll eventually need to dig yourself out of.
Budgets work by preventing you from digging a hole that will be difficult and expensive to dig out of later on.
This isn’t restrictive – it’s protective. While everyone has a budget, not everyone has a plan. You need both if you’re going to take control of your finances.
Creating A Financial Plan
If budgeting is tracking your income and expenses, then a financial plan is your strategy for reaching your goals. Whether you’re goal is to save money, to make a purchase, paying off debt, reaching financial independence, or all of the above.
How Do Budgets Work?
Imagine yourself flying a kite on a breezy day. Pushed up by the wind your kite climbs higher and higher, cutting effortlessly through the sky. You can feel the wind pushing your kite upward, the only thing holding it down the string.
Now think of yourself as the kite and your budget is the sting. It’s holding you down! If someone would just cut the string you could take off! Right?
Except the string isn’t limiting you or holding you down – and neither is your budget. It’s keeping you up. Cut the string (or live like you don’t have a budget) and what do you think will happen? The kite doesn’t soar off into the wild blue yonder. It crashes and burns. Fast!
A Budget Doesn’t Hold You Back
Just like a kite can’t fly without the tension of a string, you’ll never reach financial freedom without a budget and a plan. These two things don’t limit you – they give you options and actually allow you to fly higher!
A Budget Plus A Plan = Financial Independence
If your ultimate long-term money goal is to reach financial independence (the point where your investments and assets generate enough income to cover your expenses), then align your path to that goal with several smaller goals. One of those goals should be increasing your surplus, then investing that into an index fund so that your dollars become employees that go to work for you.
Sometimes it can feel like your financial situation is a train wreck. I know. I’ve been there. It can get to the point where you don’t even dare track your income and expenses.If you’re in this situation right now, hang in there.
Control Your Cash Or It Will Control You
Remember the first step to getting rich then do whatever it takes to generate a monthly surplus. Save money. Figure out what your magic number is then roll up your sleeves and get to work and remember: the secret to getting ahead is getting started.
So get started!