5 Tips to Manage Your Money & Build Your Wealth | Part 2: Budgeting

So, you’ve begun the practice of managing your money responsibly and building your wealth since our last 5 Tips To Manage Your Money & Build Your Wealth Video and article. But just like anything worth knowing, there are many layers to peel back before you truly begin to understand and live by the rules of financial wealth and security. In fact, you can never know it all, but the key is to take in as much as possible, so that you can be empowered. The key to moving forward in this case, is to understand that there is really no wrong way to make and maintain a budget — as long as you’re tracking your spending, versus your income, and accounting for where every dollar goes. In other words, we must treat budgeting like dieting, and understand: the best one is the one you’ll stick with! It doesn’t matter how little or how much money you make, budgeting is a simple exercise of financial responsibility, and something that you’ll always benefit from.

Let’s dive in!

Tip 1: Be Realistic About Your Budget

Today, it’s easier than ever to spend what we don’t have, and this is a bad habit that is only getting more harmful than it’s ever been. As we progress through this “Technological Age” of social media and the internet, you’d think people would be much wiser about their spending. With so much information at our finger tips, and so much advice warning against debt and irresponsible spending — why can’t most of us just get it?

First we must learn to stop trying to keep up with other people, and their spending habits, and learn to keep up with yourself. Only you truly know your financial freedoms and limitations, and only you are the sole person responsible for what you do with your money. Keep in mind that fantasies are always temporary, and reality is always nearby to rear its ugly head at the perfect (worst) time. Therefore, spending like you’re a Kardashian, when you’re really just a Johnson is a financial trap— a quicksand of debt to swallow you up, along with your dreams and goals.  Remember, something unexpected will always come up to potentially disrupt your bank account. Wouldn’t you rather budget your money effectively and realistically, so that when financial reality knocked, you’d have the financial means to answer, and "pay up?"  Rooting your budget in reality, within the limitations of your true income and expenses will ultimately help you build that Cushion of Opportunity I always talk about!

Tip 2: Differentiate Between Your Needs, Your Wants & YOU!

If you’ve had trouble building your cushion of opportunity, keep in mind that the formula for doing so is a simple one: Needs > Wants.  So basically, what you need should always be more important than, and outweigh the things you want — no matter how much you want.  Your budget should be a reflection of this basic concept.

It doesn’t matter how badly you want that Gucci belt, the track pants, or the latest FOG shoes. The fact of the matter is that these things (especially trendy things) are so temporarily relevant, that you’re better off saving those hundreds and thousands of dollars for something more meaningful, useful, long-lasting, and / or impactful for your overall life goals, career, dreams, etc. If you don't know about the hierarchy of needs, learn them.  This concept also goes back to the idea previously discussed where I mention the importance of sacrificing today for something better (and more important) tomorrow.

To help you better identify your Needs vs. Wants, here’s what you need to know:

  1. Identify Fixed Expenses: A Fixed Expense (NEED) is something that you are required to pay on a regular basis that does not change much in amount or its significance, and cannot be altered, adjusted, or eliminated.  For example: If you have a mortgage, rent, car note, loans, insurance payments, and other bills, etc., then these are a fixed expenses. These expenses will require payment, without fail — even in the face of a natural disaster. These expenses get priority, and there are no if’s, and’s, or but’s, about it.
  2. Identify Discretionary Expenses: A Discretionary Expense (WANT) is anything that can be adjusted, lowered, altered, or canceled — and ultimately, you can live without (even if it's not preferable). For example, things like eating out, shopping, entertainment, traveling, etc. do not need to occur every month, and can be left to your best judgement. Depending on the fixed expenses of that month, and the remaining funds available after those expenses have been paid, you are able to allocate sending in your discretionary expenses.  And of course, the less you spend in this category, the more money you will have left over for the most important part of the budget... YOU!  So, be wise and disciplined in your discretionary spending practices.

Remember this rule of thumb: 50/20/30.

50 percent for Fixed Expenses | 20 percent for Discretionary Expenses | 30 percent for YOU (Savings).

Sound too easy, or too tough? Then you can always adjust those figures to better match your personal income level and financial situation.  However, the more you understand the power of effective budgeting, the more your financial situation will become a tool and resource FOR you, and not AGAINST you.

Tip 3: Include a Miscellaneous & Savings Category in Your Budget

By building a Miscellaneous Category into your budget you will automatically set aside a certain amount of money for those unexpected financial hiccups that always seem to throw us off track.  How many of you have gotten a flat tire, or your car break down, or even worse, you are faced with a medical emergency — and you are stuck in panic mode, wondering where you will get the money to solve these problems?  Well, the miscellaneous category is designed to do just that — protect you in times of unexpected emergencies, and to cover you for categories in your budget you didn't think of.  The great thing about having a miscellaneous category is that if you do not need the money you set aside each month, then the money can just roll over into the next month's budget, adding a higher insurance plan for your bank account.  You also have the option of using the unused funds for your locked savings account (discussed in the previous article).

When you put money into a miscellaneous category, it essentially becomes your secondary savings account — your back up budget for any and everything that could possibly occur. Don’t touch it unless the unthinkable happens!

Speaking of Savings, having this category is just as important for you, because without it, you may not remember to set the money you wish to save, and start building your cushion of opportunity.  Having a savings category built into your budget assures that you will alway allocate money toward your future, your dreams, your goals, and of course, for times of critical emergencies.

If you don’t have a miscellaneous & savings category today, use your favorite budgeting tool right now, and put forth a down payment to begin investing in the unforeseen.

Tip 4: Use Budgeting Apps to Help You!

Dave, Acorns, Mint… There are countless apps and tools just lying around waiting to help us get our money in order. It wasn’t always like that!  These available, and often free apps are incredible tools for helping you to organize your income versus expenses, and to truly become accountable for where every single dollar goes.  It is important to research the best app for your specific needs, but not having one at all is cheating you from a great resource and advantage toward financial growth and freedom.

These apps should NOT be mistaken for assistants who do all the work for you! Again, these apps are tools that make it easier for you to get the job done, so don't go expecting to do the absolute minimum and see results. You still have to put in some amount of work, time, and effort, but with the help of budgeting apps, you can put in less work, time, and effort. Just look up how things were done before smartphones came along.

With that said, you have no excuse for not being a responsible adult who manages, monitors, and maintains their budget daily, weekly, or at the very least, monthly. Treat your finances like a baby. You have to watch it consistently, and it will grow bigger and bigger as you give it more of your time and attention. Begin to neglect it, and you’ll stunt its growth and possibly risk it dying prematurely. Take care of your budget-baby, and one day it will definitely take care of you!

Tip 5: Align Your Budget with Your Goals & Values

If you aren’t aware, intention sets the stage for everything we do in life. Whatever you do, from your habits, to your attitude, require you to ask “why?”. Why are you going to college to become a doctor? Why are you always trying to keep up with the latest trends? Why haven’t you started budgeting yet?

Be honest. Ask yourself why, and you will learn far more about yourself than you ever knew. And just like false intentions lead to trouble in other areas of life, false intentions can lead to financial trouble as well. You must be honest with yourself about your financial goals, and learn to align your budget with these goals and values.   If you are an aspiring entrepreneur destined to build a new business, then you must create a budget that accurately reflects the goals you have to achieve that big dream.  Your budget should focus on all the expenses required to make that business a reality.  The things that detract from you achieving that goal should be filtered out of your budget as quickly as possible.

When it comes to your intention and values, make sure that you are budgeting because of the answer to your authentic "why" — not because of any other reason, especially those reasons that are connected to what others around you are doing, feeling or thinking. Your budget should always be a clear reflection of your ambition and your direction, not anyone else's.

How Big is Your Cushion of Opportunity?

So now that you’ve really got it down, how big is your cushion of opportunity? How big would you like to see it grow? Have you started at all? Don’t hesitate to begin if you haven’t, and understand the commitment, dedication, and discipline necessary to be a responsible budgeter. If you know you aren’t ready for it, then be honest with yourself. But remember, as long as you’re dishonest and have false intentions with your finances, you’re not cheating out anyone but yourself. You can have better credit, more money saved, or the vacation of a lifetime if you weren’t worried about impressing people who are actually in the exact same boat (or worse) as you.

Let's make a decision today to take charge of your money, and start budgeting for your wealth!

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