Have you recently spoken to a person who is extremely wealthy, someone who is worth over a $1m, and asked them if they have a budget? Do you think that they sit down each month and follow the budget down to the last penny and use fancy spreadsheets and software?
I have some good news for you.
I have done research and spoken to 23 extremely wealthy people. Here is what I found. They have extremely good and intimate information about their finances but don’t have a personal budget.
That does not make sense right…
Here is how some of them explained this to me. “You see a budget is for someone who has to control their money because they do not make enough money to cover their bills each month. You are going to struggle and never really achieve financial success, because all you are doing each month is trying to control every cent according to a budget.”
What happens when you resist. Your subconscious mind pushes back. Remember the time when you were forced to eat vegetables because you were told they were good for you. Same thing happens at a deep subconscious level with your budget.
It is not your fault because your brain is resisting the entire process and you end up ignoring your budget except in January, when it becomes part of your new year’s resolution.
Deep down we are all emotional creatures and make decisions on emotions. We were taught to spend from an early age. And now we try to constrain our habits by using a budget.
Every financially successful person I know has a personal finance system. You may be thinking, what is a system. Think of a system as a mental financial blueprint ingrained in your mind that gives you the ability to spend without matching the pennies and still finish rich.
You may be thinking that this is just semantics, and at the end of the day it is just the same concept. You are wrong. In fact “poorly” wrong.
Now a system is different.
Here is what a system is. You decide in advance what you are going to need to be successful. Then you create a system to make sure you are on track and never have to worry about your finances, ever.
Okay, think of it this way. You decide to lose weight. You write down a plan, go to the gym, skip a few days and back to your old habits again. Now what happens, if you decided that the only way to lose weight was to get a personal trainer?
Now here is the interesting part. The personal trainer comes to your home at 6 am every day. What are your chances of success?
Very high I may add.
So what is a financial system?
Step 1: You decide in advance how much extra you want to save each month.
Let’s say it is $300. When you get your paycheck, you immediately transfer this into a savings account. It has to be automatic. You make your savings automatic and first.
Step 2: You figure out what your bills are for a month. You set this electronic payment from your account or use one credit card for all your bill payments. So without thinking about it or budgeting all the bills are taken care off. Remember to settle your credit card in full for the month.
Step 3: Have a separate credit card for your discretionary spending. Get a set limit on the card. No more. Set up your checking account so that it pays in full only what your limit is each month. So what happens? You don’t spend more.
Step 4: Go ahead and spend. Now once you reach your limit on your card you set your personal finance system to automatically shut down. You spend but you constrain yourself to your spending limits.
You see the simple and profound difference?
The simple system is set up to work for you. All you do is spend. It automatically trains your brain to develop habits to spend up to certain amount. If you go beyond that the system works and provides you guidance to keep you on track.
Remember a budget is just an academic paper exercise. It is reactive as you only look at this at the end of the month after you have spent all your funds. Yes, it does work for some people. But if you have a hectic lifestyle, very little time, hate looking at your finances, the success is in the system.
Do yourself a favor and try out one step this month. Set up a spending limit for all your bills. Pay them automatically and directly from your checking account. Then next, set up one card for your discretionary spending with a limit and see what happens.
Managing your money becomes much easier if you have a software program to record and analyze all of your financial data. These money management software programs can do anything from download daily transactions from your checking account and other investment accounts, help you budget and save toward long term and short term goals, as well as working toward eliminating debt. Here are several recommendations for money management software and what they can do for you.
The first money management tool which is offered online for a small monthly fee is the service called Mvelopes. This software is specifically designed as a personal home budgeting tool. Mvelopes works similarly to the old fashioned budgeting tool of placing cash in different envelopes to be used for different expenses. The only differences is that Mvelopes offers virtual envelopes. Similar to Quicken, Mvelopes downloads transactions from all of your financial accounts daily and allows you to classify each transaction into specific spending categories.
When comparing Mvelopes with Quicken or Microsoft money it is easy to see the differences between the two. Unlike Quicken, Mvelopes allows you to access your personal budget from any computer with Internet access. It also tracks all your credit card purchases and sets aside money from each of your envelopes to pay it off each month. This feature allows you to reduce your debt in a matter of months. With Mvelopes you can also pay up to 15 bills per month online for free. They also provide personal budgeting coaching to keep you on track to reach your goals. The monthly cost for Mvelopes is $7.90. They offer a 30 free trial offer.
Another online money management software is GnuCash. This service is free and uses professional accounting principles to organize your finances. Similar to other money management software programs, GnuCash downloads all of your financial information from all of your bank accounts and investment accounts. It then offers an analysis of your spending and saving habits complete with graphs and pie charts. This money management software is simple to use and understand, it’s much like using your checkbook register. Another benefit of GnuCash is that you can track both personal and business finances so you don’t have to have separate programs for each entity. This software also makes it is to organize your taxes.
If you are looking for money management software that will allow you to make educated stock trades and to track your investments, then you should look into ManusRisco software. This software is easy to use and allows you to make informed and wise investment decisions based on your trading style. The software analyzes various trade possibilities and plays a positive/negative expectation game in order to give you the best possible trading decision. Following the analysis stage ManusRisco will provide a full report to help you maximize your profits. This software is designed for businesses.
The one thing that all of these money management software programs have in common is that they are all available online. You no longer have to worry about backing up your computer every time you update your financial software. These money management tools will allow you to make wise decisions regarding your finances and help you get out of debt.
When building a personal budget, you have to cater to your own needs and situation. You can’t look at a general budget and decide it will work for you. Do you have an extra long commute to work? $100 per month on gas probably won’t work for you. Do you have a family of eight? $300 per month for food might feed half of you, but not the whole family.
If you are trying to design a good budget you need to follow some basic personal budgeting strategies. First, make sure you are recording all the money you make and that you are making the most that you can. Don’t just include your salary and think that tips, side jobs, overtime, or interest don’t matter. It is all money that you are spending.
Also, don’t give up on opportunities to make money, especially if you need it. Are you a teacher? Don’t pass up tutor opportunities. As a certified teacher, you can make a nice wad of cash in 30 to 60 minutes. As a business professional, do you get asked for advice a lot? If you are spending hours a week advising people, you should charge for it. You spent a lot of time, money, and effort to learn what you know, why should others get it for free?
Next, you should really examine all of your expenses. Write down every expense for 2 to 4 weeks. Don’t miss anything, no matter how small the expense. Analyze where you are spending your money. Anything that you could easily live without cut out, and anything that has a cheaper alternative, swap. Some people are very lenient where they cut back on expenses. Even if you aren’t in debt, you could save a lot of money to put away for retirement. You’d be surprised how much you can save.
Design a plan you can stick with. Don’t be so outrageous with your budget cutting out expenses that severely impede how you live. For example, if you think you can save $200 a month by not driving anywhere, but you have a 30 minute commute to work, well, you can figure it out. It’s not going to work. On the other hand, if you have tens of thousands of dollars in debt or more, you may seriously need to consider a downgrade on everything. If your rent or mortgage is too expensive, downgrade. You need to do whatever you can to secure your financial future.
Finally, stick with it. This is the most important part of keeping a budget. You have to stick with it! If something seems impossible to do, than modify it, but this doesn’t mean giving up entirely on the whole budget. Nobody said keeping to a budget would be easy. You just need to do it!
The topic for this article is Personal Finance Budgeting. The first step in becoming financially responsible is starting out with a personal financial budget. Absent a budget there is no way one can possibly track their income and expenses.
Before getting into what personal budgeting finances are I want to explain why budgeting is important. For this idea we will say that you have decide to startup a business, a personal financial advising firm. When establishing your financial advising firm the first thing to be done is the planning out of your company expenses. Most people would logically budget for their expenses before they began because without this financial planning you would have no idea of whether or not your financial advising firm could potentially be profitable. The next thing is to plan out your revenues. Then you would take the difference between the two and see whether things looked good or not.
This is what a financial budget is for a company and people should handle their personal finances in the same manner. When establishing a personal financial budget it is important to include everything that involves your money.
You can find personal finance software on the internet. This software is made so that you can easily enter all your income and expenses and it does everything else for you.
The components in a personal financial budget include both income and expenses. Examples of income in a personal finance budget include job income, gambling winnings, capital gains, social security, tax refund, etc… Examples of expenses in a personal budget worksheet include SAVINGS, electric bill, health insurance, cell phone, groceries, books, shoes, clothes, car insurance, gas, entertainment, travel, miscellaneous, etc.
This expense list does not include all potential expense, I’m sure you can think of others right now. Anything possible thing that you can think of that you might need to spend money on should be put on your personal budgeting worksheet.
I know that some of you are thinking to yourselves “Savings? What? Thats not an expense!” Well I’m here to tell you that savings should indeed be thought of as an expense. Each month one should personally budget for a certain amount of their money to be saved. This should not be an “if I have money left over” situation. It should be definite and as automatic as writing that check for your mortgage every month.
The most basic concept of personal budgeting is to control spending and use your money wisely so that you have money left over rather than having no money or going into debt.
After listing your income and expense on your budget worksheet you need to subtract the expenses from your income and get a Net Cash Flow for the month. The idea is to include all income and costs and come out with a positive cash flow on your personal financial worksheet. If the number comes out negative then you have a problem and your expenses will need to lowered.
Now you know exactly what a budget is and how to make one. The next thing to is run a few Google searches an find a budget template to make things easier.
You need to keep a budget every month. No, you cannot simply make one plan for the whole year and stuff it away somewhere to forget about it. Our income levels change and our expenses change and these changes need to be accounted for.
To be successful with your personal budgeting plan you need to make out a projected personal budgeting plan for the whole year. Then as each month passes you can make monthly adjustments.
The other thing to do is keep a record of your actual income and expenses and compare that to your personal financial budgeting worksheet. You want to make sure that your original estimates were correct or at least close.
The thing about a personal financial budget is that it sets you up for success and helps keep you from needing to use credit cards or other debt to make it.
If you have an accurate personal financial budget then you will be prepared for the unexpected financial burdens that happen from time to time.
There should be no issues when your car breaks down and you suddenly need $300 to fix it. All is good because you have been putting money into savings each month.
This is the most basic idea of personal financial freedom and personal finance budgeting. If you can establish a sufficient level of savings then you can begin to be at ease with your financial situation.
Most people are clueless and don’t realize that their unplanned/unwritten actual personal finance budget includes something like $4500 of income and $4700 of expenses each month.
Next time I will take a short break from the Mini Series and instead suggest a few personal financial budgeting software programs that are available out there.
Budgeting is important to your family’s financial health. Those with strong budgets tend to have their lives in much better order financially. Slowly, no matter what kind of income you have, you’ll see your net worth increase as you stick to your plan.
But what if your plan is weak?
Following is 10 steps to help improve your budget:
1. Use Microsoft Excel- Don’t waste your money on expensive budgeting programs. You can have a budget that is just as effective using some type of spreadsheet (Excel or Google Spreadsheets work fine). Simply learning a few formulas online, you can create a fully-customizable budget that adds, subtracts, multiplies, and divides any figures you need.
2. Determine Your Net Income- Doing a budget off a gross income makes it more difficult to compute. Taxes will be taken out of your check each time and that money may never be realized until you get your tax return back for the year. Be sure to calculate off a net figure; in other words, how much do you bring home monthly/weekly AFTER tax? You’ll have a better grip on what money you actually have to work with each month this way.
3. Determine Your Fixed Costs- What sort of expenses can you expect each month that don’t change? These are fixed costs, and you should have a category for them so you can see what are solidified expenses that can’t be avoided. Typically, your fixed cost line doesn’t have any wiggle-room. It could be a car payment, home mortgage, or insurance expense; these don’t change month to month.
4. Know Your Variable Costs- A variable cost is one that tends to do just that- vary. This could be your grocery bill, entertainment fund, misc. fund, gift fund, etc… From month to month, these tend to be a bit more flexible; if you know you’re going to be tight for money one month, look to you list of variable costs to cut where you can.
5. Every Dollar Needs a Spot- Make sure that every dollar has a place to go. There shouldn’t be any money at the end of the month that doesn’t have a job. Categorize where all of your money will go. If you fail to do this, you’ll end up spending what extra money could be saved!
6. Set Goals- If you have no end goal, you’ll fail with a budget! Is there a new home you’d like to get your hands on in the next 2 or 3 years? Maybe it’s the car you’ve been dreaming about since you were young. Whatever the case may be, have a goal and let that be your motivation to stick to that budget. If not, you will fail!
7. Save Your Receipts- If you don’t save every receipt, you’ll find that remembering all of your expenses will be tough! After making a purchase, make sure that you not only get a receipt but have a ready spot to put it. That way, at the end of the night when you’re updating your budget, you won’t let any expense fall through the cracks.
8. Update Your Budget Daily- This one is a must! Make sure you don’t wait until the end of the month to track all of your money’s goings and comings. You’ll find that your results will be inaccurate; and if that’s the case, what’s the point of your budget?!
9. Evaluate Each Month- If you’ll take a good solid 30 minutes at the end of the month to go over what happened with your money, you’ll have the statistics to help you see strengths and weaknesses; those numbers promote change. Otherwise, you might find that you’ve spent a lot and you know you need to change, but you won’t be able to identify those areas that need it most.
10. Have A Leisure Fund; Have Some Fun- You’re budget should create a little room to have a little fun! Budgets tend to have a bad reputation because they are often too restrictive. Allow you and your spouse to have a little fun with that hard earned money! Lay aside x-amount of dollars for a “leisure fund” each month to help keep your sanity. After all, you have to have a little fun with your money, right?!