The research is in. The findings are conclusive. Anyone can create the lifestyle and legacy that they want—even you, especially you! The good news is that if you want to grow wealth, you don’t have to time the markets perfectly, make a six-figure income, or inherit a fortune from your deceased uncle. The bad news is that it’ll take work and you’ll have to do the exceptionally boring, yet all-important task to get you there—budgeting.
Budgeting is the most essential part of your financial plan. Without it, you’re destined to fail; it doesn’t matter how much you make. This is why professional athletes who make millions of dollars over their careers often retire from the industry in bankruptcy. Sometimes high earning individuals live paycheck-to-paycheck because they don’t have a solid budget. They are squandering a prosperous income on junk they couldn’t even sell at a yard sale.
Believe me, I’ve struggled with budgeting. We’ve all been there. I like eating out for lunch with friends downtown. I love my coffee in the morning. I have video subscriptions to Netflix, Hulu, and Amazon Prime. I have 12 active magazine subscriptions. I love my haircuts and buying nice clothes. Last year I spent entirely way too much on eating out. I recognized that I had a problem, so I got on a budget and for the most part, stuck to it. As a result, I was able to put more into my retirement savings then I spent on eating out last year. As a financial advisor I want to model the habits that I’m asking my clients to put into practice, so it was important for me to do this.
As humans we tend to be hopeful for that next thing around the corner be it a new car, new house, new relationship, or new job. In western culture this often translates into dollar figures. In the age of seeking immediate gratification, workers will buy the next hot product in stores or finance flashy items they can’t afford. Within a year these items no longer bring as much happiness and consumers are off to buy the latest thing while still paying for the former things, continuously a slave to their lenders.
The concept of budgeting is simple—you should spend less than you make and then invest the rest. While the concept is simple, the practice isn’t easy because you’re trying to change a habit, and that takes work. Imagine if you were a secretary making $40,000 a year but you saved $5,000 a year for retirement. After 30 years you could walk away with $612,000 and wave by to all the executives who never budgeted and are stuck working ‘til they die, because they didn’t know how to budget and save.[1]
The importance of budgeting can’t be overstated because it doesn’t matter how great your returns are in the markets, if you can’t budget the money to buy into the markets. It doesn’t matter if you make $2,000-3,000 in the markets one year if you aren’t also saving an equivalent amount each year. Benjamin Franklin said it best, “a penny saved is a penny earned.”
Imagine what could happen if you were as intentional with
your money as you were with organizing your closet or keeping your car nice and
clean. What would happen if you told every dollar in your budget where to go,
and then you actually did that? What if you delayed some gratification in your
life today so that you could have more of what you really want in your life
tomorrow? The choice is yours. Why not win with money? It starts with
budgeting. After you’ve conquered budgeting, we can move on to more fun, and
complex ways to grow your wealth.
[1] Assuming 8% rate of return and $5,000 invested at the beginning of every year for 30 years.