You’ve begun to lay your foundation by receiving consistent income. You have money flowing in from your full-time position, freelancing specialties, or side hustles as you gather resources. If you’re like most people (which, pretty much we all are), then you have bills to pay, food to buy, and savings accounts to fill.
Your next stop on our roadmap begins. Budgeting.
First, a few questions:
- How much are your bills this month?
- How much income will you receive this month?
- On average, how much do you spend on groceries? Alcohol? Restaurants?
- Percentage-wise, how much of your income did you save last year?
If you are unable to easily answer these questions, then this series is for you.
This post is part one of three in the Budgeting Series:
What is a Budget?
At a high level, a budget breaks down how you use all of the money in your life. It helps encourage you to live within your means and introduces accountability to your goals. Let’s deconstruct it into three areas:
Area 1: Estimating Income
Income, your brave knights ready for war, is your biggest resource as you travel down this arduous road. Just as great generals know their army size, you too must assess your troops.
There are various strategies used when completing this task that we will cover in our second post of the budget series.
No matter the strategy, to effectively budget, you must know the reinforcements entering your bank accounts each month. This means it’s crucial to realistically estimate future income by summing assumed upcoming paychecks. You may be thinking, how can I do this if my income isn’t consistent? We will cover the hows later in the series – stay tuned!
Area 2: Estimating Expenses
Enumerating your expenses exposes the hard truth that some refuse to face. Many of your outflows are like the extra fat on 70% lean burgers. As you scrape that hardened lard from the pan, you realize that those burgers didn’t deliver the gastronomic pizzazz they promised. Just wasted grease.
You can’t trim expenses if you don’t know what they are. That’s where we come in, to shine a light on the dragon enemies that you might slay them all the easier. Your knights are ready for the war and we know the weaknesses of the boss at the end of the dungeon.
Prepare to command your cash.
Area 3: Commanding Your Cash
Serving as commander-in-chief to your knights transforms you from a passive to an active achiever of your goals.
It’s like becoming Goku as you power up to Super Saiyan level. With this new power, you become the master of your faith. You now can protect your family from mishaps by commanding money into your emergency fund, or you can grow your net worth by budgeting for investments. You can use the magical power of compound interest by diverting higher contributions into your 401(k).
If you don’t have cash flow intel, then your power drops to Krillin levels. In non-DBZ words, you lose that executive power.
Instead, read all of the posts of the budgeting series and start taking command!
Some families anticipate payday as their biweekly issuance to scrape by until new money flows into their struggling bank accounts. We live in a world where companies demand our compulsion to consume, to buy status symbols. The world and culture we live in push the spendthrift lifestyle upon us.
A budget begins your first step towards developing deep foundational habits that challenge our culture’s status quo. We have the opportunity of better life. Together, following the small steps in our roadmap, we can take advantage of it. Below are four reasons that show using the time to budget is time well spent.
4 Reasons to Budget
1. Peace of mind
- Each month, you will have freedom from stress and worry that your bills are paid, your investments have been made, and your savings goals (the big three) have been met. You can now buy that new espresso machine (ROI > Starbucks) stress-free
- Estimating the big three (from bullet 1) allows you to prepare for big purchases. It lets you enjoy your hobbies and entertainment without worry.
- Ever gone to bed thinking about how I will pay my medical bill next month? Tally all of your bills in a furtive attempt to deduct it from your paycheck? Budgeting ENDS these thoughts. You now KNOW ahead of time, and that my fellow dukes is why it is key your financial success.
2. Automation (Be Careful of Mistakes)
- In the tech age, companies continuously automate processes. Manual tasks waste time and are prone to errors. Automation saves time, and that saves money. For you, this means more time enjoying the wealth of a well-built kingdom: one lived to enjoy life’s experiences the way you want!
- To automate, we must first budget. Dealing with overdrafts from haphazard automation is a painful buzz kill to optimizing your monthly cash flow. Budgeting is again the salve, an essential step in building a foundation to raise your empire.
- Dopamine, the chemical that keeps us motivated and gives us the feeling of pleasure, releases as we achieve goals. Creating a budget with financial goals (like savings, or IRA contributions), then tracking them to completion by the end of the year equals more DOPAMINE.
- Achieving financial goals goes further than this. Not only are you rewarding yourself through brain chemistry, you’re rewarding yourself with a better lifestyle. A life of a Duke of Dollars.
4. Goal tracking
- In our roadmap, we provide milestones and goals. For example, maxing out your 401(k). In 2018, this means investing $18,500. Planning and monitoring progress toward this maximum contribution brings us closer to achieving it. Yet another benefit of budgeting (YABB).
- Tracking our savings rate for the year DIRECTLY relates to how long it will take to retire.
Budgeting can be made easier with new tools and spreadsheets. We will be detailing efficient ways to step up your personal finance game soon.
You’ve completed the first post in the series. Ready to learn about different budgeting strategies? Well then continue on our crusade!! Take a left past the inn, find a shady tree, sit down, and peruse the next post in our budgeting series.