Budgets! The “B” word. Ugh! When we mention budgets to clients, usually heads start spinning and eyes glaze over. However, budgeting is the core of understanding how to grow wealth. Understanding your own personal budget is the first step on the yellow brick road of wealth. Don’t let the Wicked Witch of the West stop you. Your budget is your pair of ruby slippers. Let’s set you on your road to Oz.
1. What Is a Budget?
A budget is an itemization of your expenses and income. It provides a financial description of transactions you make over a specific period of time, such as a week or a month—or longer. A budget also provides an opportunity to do a self-assessment. Looking at how your income flows in and how your money is spent can provide a realistic storyboard of your life.
2. What Does a Budget Include?
Everything. Absolutely everything. Most importantly, a budget includes your fixed expenses (such as rent and mortgage payments) and your variable expenses (vacations, concerts, birthday presents). Yes, I know this very difficult to monitor. And it can be overwhelming. No worries, we can talk about that in the next paragraph. However, the point I want to make here is that your budget represents you. It’s your selfie. And, unless you’re using cash every day, all the time, it is the picture banks and credit card companies see. (For related reading, see: Top 5 Budgeting Questions Answered.)
3. What Are Some Tools You Can Use?
Well, you can always be old-school and use pen and paper or an Excel spreadsheet. However, there are a number of different apps that can make this process easier. These apps are connected to your bank accounts, debit cards and credit cards. As a result, you’re able to monitor in real time your income sources and spending patterns. These apps can provide you with your personal cash flow report. These different apps provide different perspectives, therefore do some research. Here are some options: Want an overall picture? Mint.com. To help make changes in your behavior: You Need a Budget (YNAB). Want to monitor your discretionary income? Levelmoney.
4. Using Your Budget as a Goal
With data on your weekly or monthly transactions, a budget can help you set targets or goals in specific categories. For example, if your monthly transportation bill is a bit on the high side (because of Uber), you can set a reasonable target allocation for the month. Same goes for food, entertainment and other variable costs. For the most part, variable costs are where you’ll find the most opportunity to make the most changes. Using a budget will help you monitor these changes over time. (For related reading, see: Budgeting Basics—Goal Setting.)
What Do I Do With This Information?
As with all data, use it to learn something. Are there changes you can easily make that will improve your financial picture? Or, perhaps you are well on your way to accomplishing a significant goal. Using a budget is an easy way to monitor your accomplishments. Think about this. Because your budget is your self-portrait, do you think it adequately portrays who you want to be? It was only after Dorothy had a better understanding of herself that she realized that the journey to Oz was really her path home. (For more from this author, see: 5 Steps to Build Wealth and Grow It Over Time.)