Dave Ramsey, the personal finance guru, says “A budget is telling your money where to go instead of wondering where it went”.
I think he also said that if you don’t tell your money where to go, it will leave. Thus, without allocating money to specific categories, we will spend it all and on stuff we don’t need.
Budgeting is the dirty word when it comes to our personal finances. It is easy to do and also easy not to do and that is why so few people do it consistently. Yet, we envy those who do it well since they live simple, disciplined and forward thinking lives. Simplified, a budget is an estimate of income and expenditures for a set period of time. In other words, doing it allows us to know what comes in and goes out so that we can plan, save and spend accordingly.
A Google search for “budgeting” renders more than 56M results. With this much information available to anyone in the world, why is it that we don’t all operate balanced budgets? The reason is simple. Finances, like weight loss and fitness, is only 20% based on information and 80% on behavior. This means our results depend largely on what we continue to do with the information we get.
Possibly everything that can be taught about budgeting has already been taught. I am not going to attempt to teach you right here in this post. Instead I am going to look at a few helpful tips that might inspire you do pay closer attention to your personal finances.
You cannot afford to be bad with money.
Working with finances can be intimidating and most people don’t like it, but it is skill that can be learned, just like driving.
Brian Buffini once said:
“Saying that you are not good with money is like telling a cop that you are just not good with roads when he pulls you over for driving erratically on the highway”. You have no choice, you have to be good.”
Debt is the most aggressively marketed product in the world today.
Debt is marketed through lifestyle with slogans like “You’re richer than you think”. Knowing this, you can counter the lifestyle pressures and do what Dave Ramsey says. “If you choose to live like no one else today, then one day you will live like no one else”.
Your financial institution is in conflict of interest with your goals.
Your financial institution makes money from you being in debt. Yet, a debt free future will bring you closer to a good life. As a general rule, if your bank suggests a product, it is not in your best interest. Be educated, so that you remain in charge.
Your debit card is one of the biggest causes of debt.
It takes the emotional aspect out of money. Paying for gas with five, twenty dollar bills feels very different to just paying for it with plastic. That feeling of seeing cash disappear from your hands is the emotional value of money and it is powerful. Once the emotional value of money has been removed, we tend to spend more. Your debit card allows you to easily exceed your budget and that is how it indirectly causes debt.
Stay out of malls and don’t read flyers.
They have a habit of telling you that you need stuff that you don’t need to impress people who you don’t know and that don’t care about you.
Keep your finances top-of-mind.
Whatever you keep top of mind, you end up doing and becoming.
You can do it in the following ways:
- Reading. If you don’t like paper then buy it on Kindle so you can make notes. Buy your best books in paper so you can give it to your kids as an inheritance. My favorite, most credible, personal finance author is Dave Ramsey.
Here are four great books that have changed my life:
- Listening. There are two ways that I listen to great material. Podcasts and Audiobooks. You can subscribe to audible.com for US$15/m and get a free audio book of your choice per month.
Let your budget tell you what you can spend.
That includes your mortgage for the next house you buy. Before you buy a house, balance your budget and determine what you can spend on your mortgage through your budget. Then, let your mortgage broker reverse engineer the process and determine the purchase price from your budget’s monthly payment.
Create a budget that will prevent you from spending.
There are many great budgets out there such as:
- Web/App based budgets – Mint, Everydollar etc. These are great since they take the unnecessary work out of budgeting and they are data rich.
- The trusty Excel sheet – You can easily create it and customize it yourself.
- Paper and pen – The hardest to maintain.
- The Envelope System – the simplest with almost no maintenance.
Except for the Envelope system, budgets provide you with historic data, in other words all they tell you is what you just spent. They don’t prevent you from spending. The Envelope System is different since it prevents you from spending. If there is no money in the envelope, there is no money to spend, which means there is a much greater chance you will stick to your budget. The Envelope System is also a great way of teaching your kids the value of money since it is very visual.
Pay yourself first
Don’t pay yourself after you have paid everything else. Needs and wants are unlimited so if you don’t pay yourself first, you will not pay yourself at all. Remove 10% off the top of your pay when you receive it. Start small and create a small reserve fund for your family. This will prevent you from using your credit cards as a reserve fund.
Build a financial future in the following way:
- Save $3,000 as a reserve fund.
- Pay off your debts using the debt snowball method.
- Then continue saving until you have a reserve fund equal to 6 months living expenses.
- Once you have done this, invest your money.
Dealing with your finances is hard, just like trying to get in shape. But, the rewards are amazing and worth the effort. If you need help, look for it; sign up for a coaching program to help you get ahead. You will be thankful for it.
Jacques du Preez or any of Mortgage Allies’ Agents and staff are not financial planners and do not get paid for any of the materials they mention in this blog.