Don’t trust me
I will share with you my knowledge on how to create a useful budget for your personal use. Because this is my knowledge, I cannot guarantee what works for me will work for you. Therefore, I encourage you to exercise your own due diligence. Apply the principle of “Trust but verify”.
Why do you want to budget?
Ever heard of the saying that goes, “The stronger your WHY, the easier your HOW”?
So please take this moment and ask yourself this question: Why do you want to budget?
For some of us, we want to budget because we want to take control of our finance. For yet some of us, we want to budget because we want to save up for a huge spending you foresee in the future, e.g. children’s college fund. And for yet another group of people, we want to budget because we want to become rich and budgeting helps in the process of tracking where the money is being allocated for investments and such.
In case you have not realized, this article is meant for those who desire to budget. If you do not wish to budget, you really should not be here. If, however, if you have gotten interested in this topic, feel free to read on, because I am about to share the main message of how you can create a useful budget.
Two key benefits of budgeting
- You can track where your money flows
- You can plan ahead for contingency plan and future spending
I am an excellent money manager!
All the rich people I know of, personally and indirectly, have a common characteristic. They are all excellent money manager. They know where their money flows in from and out to. In other words, they are superior stewards of their financial resources.
Stewardship.
What is a useful budget?
It is always to your advantage to first establish the definition of a useful budget. A budget can be a lousy budget if you do not define it. So here is my definition:
A useful budget is a financial plan that is estimated ahead in time for the user to achieve his or her financial goal in the near and far future.
Depending on the time horizon one may be looking at, the specifics of a budget may vary. For the purpose of this article, we will be generalizing the nature of an useful budget.
Secrets on how to create a useful budget
Finally, here is how you can create a useful budget…
1. Cultivate the habit of tracking your money flow
You cannot measure what you cannot track. If you are a smart phone user, I recommend you to invest in an application that can help you track your income and expense of money. I am an iPhone user and my favorite application at the point of writing is ExpenSense. Do check it out on the App Store.
2. Know your expected periodic income, i.e. monthly income
Do you know how much money you earn per month? Are you earning on commissions? How many day jobs do you hold? Do you have a consistent flow of active and/or passive income?
3. Know you expected periodic expenses, i.e. monthly expenses
Do you know where you spend your money on? I bet most of your friends don’t know how much they spend on food per month. Here are a few main necessities expenditures you want to take note of:
- Food, e.g. meals and snacks
- Transportation, e.g. cab, bus, fuels
- Utility bills, e.g. house phone, Internet, mobile phones
- Insurances
- … And more.
4. Plan ahead in such a way that you spend less than you earn
In business terms, what remains subtracting what you spend from what you earn is called a positive cashflow. I strongly encourage you to be able to have a consistent positive cash flow on a monthly basis even after you have plan your budget.
Last words on creating a useful budget…
Reality check. Do you save first or spend first when you money comes in? The habit of the rich at heart will always save first. To make your budget work, you must, again I say, you must be disciplined. Shun procrastination from saving and investing. Save! Invest!
The key idea is in your money allocation.
Here is a fool-proof method to allocate your monthly income in your budgeting system. Use it and test it out!
- Savings – 10%
- Education – 10%
- Play – 10%
- Investing – 10%
- Giving – 10%
- Necessities – 50%
Quick tip #1: The rich treat savings and investing as a form of “expense” because they know they must save and invest to grow their money. You can do the same.
Quick tip #2: The rich spend a lot on education and investments because the understand that the best investment is investing in themselves. Notice how millionaires who go bankrupt can easily become millionaires again in a few years and how a poor (poor in attitude and mentality) man may strike a fortune via lottery and quickly loses the money in a few years too.
I hope this article has been valuable to you. Feel free to contact me and let me know if the methods here is useful to you. Cheers!