Make a budget and stick to it - 5th of top 14 things you should start doing immediately to get rich
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Note: This is the fifth of 14 consecutive posts from 2nd to 15th of April about the principles of how to get rich. Check back daily or subscribe to the RSS feed
Making a budget is one of the most important instruments that you can use in order to help you become rich.
The reason that a budget is so powerful is that it enables you to see into the future. If you make a good budget that you are able to stick to means that you know in advance how much money you are going to spend. And even better - you know what you will spend it on! Knowing your expenses let’s you come up with the sum that you can comfortably keep to yourself - the money that is going to make you rich.
There is nothing to be ashamed of when you are unable to exactly follow your budget for the first few times. As time moves on and you get more experience on making and following a budget it gets easier to stick to it. When making your first budget it can be easy to underestimate the amount of money you need for eating out, for spending quality time and so on.
When making your second budget you already know from the first budget what are the areas that you thought you will spend less on and what are the areas you figured you’ll spend more money on. I can promise you this
Each time you make a new budget it will be an improvement over the last one
Why is a personal budget so important?
A budget gives you the control over your money instead of letting the money control you. For instance most of us don’t really think about all the small amounts of money that we spend. The problem with small amounts is that a lot of them added together makes a big sum.
Going out for a quick snack would usually be a no brainer but if you know that you have exceeded your monthly budget for eating out you will think twice. If a budget keeps you from spending the money that you didn’t want to spend in the first place - it has accomplished its goal.
For what period of time should I make a budget for?
It is a good idea to make a budget for every month. The reason is that usually we get our bills once a month. If we know how much they will be it is simple to budget them ahead. Some people also have their yearly budget just like companies have but for most people it is better to start with a monthly budget. It is much easier to do and you can feel the positive effect sooner.
A good tip is to think about yourself as a company. If you are about to spend some money you should think what long term value does it give? Companies never spend money without hoping to get back more. A budget is the most underlying thing that determines everything a company does. Would you imagine General Motors without a budget? They wouldn’t know how many people they should hire, how much they should pay them and how many cars to make. It would be a total chaos.
A sample budget
Depending on a person the way your budget looks can vary but the underlying principle is always the same. The following is a sample budget.
Income
4000 dollars/month
Expenses
Mortgage - $ 1050
Cars - $ 850
Insurance - Auto - $ 150
Insurance - Life - $ 60
Installment Loans - $ 125
Phone - $ 75
Utilities - Gas/Water/Electric - $ 125
Groceries - $ 400
Eating out - $ 200
Entertainment - $ 300
Gasoline for Cars - $ 200
Total Expenses $ 3,535
This is what a sample budget looks like. This budget has a positive cashflow of $ 465. Saving and investing this money will eventually make you rich.
Remember that
A budget is one of the most important instruments that you can use to become rich
2 Responses to “Make a budget and stick to it - 5th of top 14 things you should start doing immediately to get rich”
By Jaak on Apr 27, 2008 | Reply
I recommend having both a yearly and a monthly budget - may be even a weekly one. The shorter the time period the more detailed it should be. This way you can be pretty sure that there will not be a money deficit. You can also make a yearly budget where you have weekly summaries. It is really simple to do it in MS Excel or something similar. Using Excel one can also create a table that takes deviations into consideration. I myself use a deviation factor of 10% (a “-” for income and a “+” for expenses) for all incomes and expenses. This way it is even safer and more reliable to trust the budget.
So far a budget has proven to be a good tool for avoiding cash deficit and it can certainly be used for growing ones material wealth in the same way…
By Jaak on Apr 27, 2008 | Reply
one more thing regarding my last comment. If you make a yearly budget with weekly summaries there is no need to have a separate budget for months and/or weeks because all of the information is already in the yearly one with weekly information. It might be a little frustrating in the beginning but it gets easier with practice. I like the one I use because it looks forward in the future so there is small room for any “bad suprises”. So I would recommend a budget for one year or longer with a weekly overview.