Yes, You Need a Budget – It’s not as Bad as You Think
I often have friends and coworkers approach me for advice regarding personal finance. It’s one of the reasons I started this blog. Typically, they begin with questions about investing. I usually respond with, “How much income do you have budgeted for investments?” The look on their face is usually sufficient to prompt my next question, which is, “Have you developed a budget?” Usually the answer is no, followed by a look that suggests you just asked them to cut off their right arm.
A Budget is a Tool, Not a Chore
I don’t understand the stigma attached to budgets. I suppose many people equate “budget” with “sacrifice”, which is not necessarily the case. A budget is a tool not a chore. Developing a budget allows you to see where your money is going and how much you have left over for disposable income and investing. That’s it. It’s likely some people fear they will be forced to realize that they are spending more than they earn which, of course, means exhibiting some self control. Sooner or later they are going to need to face the music if they want to start the journey toward financial independence. Instead of viewing it as a sacrifice or fearing it, view the development of a budget as an opportunity to find lost money that can go toward investing.
Get a Handle on Your Expenses
It’s not difficult, it’s simple math. I don’t care if you develop exotic spreadsheets or use a calculator with pad and pencil. You need to see where your money is going before you attempt to save, invest, or even make purchases. Start by listing all of your static costs and necessities such as mortgage, property taxes, utilities, food costs, home maintenance, auto maintenance, insurance, etc. Whatever is left over is disposable income to be spent or invested.
Pay Yourself, but be Reasonable
Decide how much to pay yourself after you have calculated your expenses. In other words, how much spending money do you need to feel like you are not depriving yourself? Be realistic and keep in mind that your ultimate goal is to purchase your freedom. This is a good time to assess what is important to you and what is frivolous spending. Develop a perspective that values freedom over stuff. Cut out things you don’t feel are necessary and identify costs that can be reduced. All income that is left over is available for savings and investments.
Invest the Surplus
Once you develop your budget, you know exactly how much of your income is available for automatic savings and investing, which I highly recommend. Auto investing removes dough from your paycheck before you have an opportunity to spend it. This is a very useful tool for those who are not yet disciplined with their spending habits. It also makes the investing process easy. Don’t hesitate, just do it.
If you are fortunate enough to have access to an employer sponsored 401(k) or 403(b), contact them to set up automatic withdrawal from your paycheck. Invest as much as your budget allows. I will talk about the tax advantages of this and how it saves you even more money in another post. It never ceases to amaze me how many people do not take advantage of this.
Remember, developing a budget is not about sacrifice or depriving yourself. It’s about knowledge. It’s an important tool to help you identify and develop more opportunities to invest. It is the base from which your FI journey begins. It may also be a reality check to see how serious you are about reaching FI. Have fun with your budget. Play with the numbers to identify how even small changes in your spending habits can increase cash available for investing. Seriously, before you go any further on this journey toward FI, just do it.