et out of debt, build wealth for your retirement, fund the kids’ college, live a life without financial worries. Creating a budget is a best practice of millionaires.
A personal budget is one of the most essential tools needed to create financial independence. A budget is simply a plan. A financial plan. Why don’t you have one? This is the foundation, the most essential building block.
You would not build a house without a solid foundation. You should not plan your financial future without this foundation.
Most people spend more time planning their weekend or vacation than planning their financial lives. Setting good, solid goals is a formula for success. If you don’t have goals, how do you know when you have arrived?
Let’s get started constructing your budget. It will not be perfect the first time. It takes at least 90 days, three months, to begin to fine tune. After the first three months, you will hopefully eliminate all the surprises. Do not get discouraged. This will take some practice. After a while, it will be second nature. You must tell your money what to do. If you don’t, it will leave!
The best place to begin is with your income. You should know what you make. I do find that some folks don’t, which I find interesting. How could you not know?
As we all know, the government gets its share first. I suggest that you take a look at your most recent paystub. It will show you your gross income. Then, social security (6.2%) and Medicare (1.45%) tax comes out. This will be 7.65%.
Then, there will be federal and state withholding tax, followed by other deductions for health care, 401K and other items that are discretionary.
We do have some control over what we can bring home. We can opt out of certain employee benefit programs that are paid for by you, such as life insurance, vision and dental insurance and a 401K deduction.
The amount of taxes withheld can also be adjusted so that you are not over withheld. You also do not want to be under withheld. I have always adjusted this to approximate my tax liabilities. I do not want to overpay or underpay; I just want to pay what I am supposed to. Remember, if you are getting a large refund at the end of the year, you have been over withheld and the government is using your money interest-free. A tax refund is not a bonus or something the government is giving you. It is your money!
Having that little bit extra to take home will allow you to use it to build wealth.
So, now we have our income.
Include the Essentials
As you begin to build your budget, the first items that are absolutely necessary to be in your budget are food, clothing, shelter and transportation. Why budget these first? You must eat and have shelter; if you take care of these first, then you need not worry about eating and having a roof over your head.
Next is clothing because you need decent clothes to get to work and transportation to get there. Of course, the transportation does not have to be a car.
Accumulate Your Bills
Now, you want to build out the rest of your expenses. Do you know where your money is going? Locate all your bills that you paid in the last 30, 60, 90 days. Once you have these in hand, it is time to review them and write down where your money has been going. What have you been spending your hard-earned money on?
Create a list; make it detailed. Eating out, movies, coffee, lunch, cable TV, internet, cell phones, and so on. This should give you a good snapshot of what you have been spending your money on.
Once you have it all laid out, you will be able to see where you have been spending your money.
Track Your Spending
With this new information, begin to track your spending for a week or a month. Write it all down. A pack of gum, a cup of coffee, that new gadget. Did you need any of it or could you eliminate buying it?
This is a good exercise because it begins to make you intentional with your money, and that is really the goal. If you become intentional, you will be surprised as to how much you are actually spending on impulse buying.
We want to eliminate that impulse buying so we can stretch your hard-earned money to achieve building wealth!
A Work in Progress
So, now you have all your spending over the last 30, 60 90 days. Take a close, hard look at it. What do you see?
Perhaps you see a lot of debt payments on credit cards, auto loans, personal loans, mortgage and student loans. The list goes on. These are the very items that are stealing your ability to build wealth.
You most likely will see spending on things you really don’t need or are wondering why you bought them. Take this quick test: Look around and see what you could sell because you don’t use it. Accumulate all items you have that you can put into a yard sale. You will be amazed.
Now, begin to put all of your spending into categories. Begin with the items discussed above – food, shelter, clothing and transportation. Expand out from there debt payments, entertainment, vacations and so on.
As you begin to build out your expenses, be as detailed as possible. You will not get this right the first month. Something will come up that you have forgotten about. Don’t give up, just make the appropriate adjustment going forward. It will take a few months of finetuning until you get it right. And even then, things will pop up.
The important thing is that you are creating a plan for your money. This planning process is going to be the foundation for you to accumulate wealth and financial independence.
Be patient; don’t give up. It will become easier each month.
Adding It Up
We have discussed your income and have created a list of your expenses. Now is the time of truth!
Add up all your income sources and then all your expenses. Subtract your expenses from your income and …
Does It Balance?
Well, this is the moment of truth!
What is the result? Are your expenses higher than your income? Or, is your income higher than your expenses?
Either way, we most likely have some work to do!
The good news is you now know where you stand. If your expenses are greater than your income, you know why it always seems that your money runs out before the end of the month or you are living from paycheck to paycheck.
Your next plan of attack is to roll up your sleeves and take a hard look at your expenses. What do you see? Are there things you can do without? Reduce those expenses! Our goal here is to get the income-less-expenses to come to ZERO! Or, better yet, to have something left over to either pay down debt or to increase contributions to your retirement.
It may be an increase to your income can help as well. But, if you are like most, there are expenses that you will be able to eliminate. Perhaps a side hustle might be considered to increase your income.
Looking to the Future
First, let me congratulate you in coming this far. You have now embarked on life-changing habits in building the most important skill in becoming financially independent!
You work hard for your money and up until now, you were just wandering around waiting for something to happen to get you on the path to financial independence. Well, you found it! It is forming the habit of telling your money what to do instead of your money telling you what to do. You have taken control!
Don’t Give Up
One last and final step. Keep at it! The first budget is the hardest. There was so much you did not know about where your money was going. Now you know! Is it not a relief? With this information and your persistence, you will be successful.
Creating a budget month after month becomes easier each and every time you do it. Remember, a budget is simply a plan for your money. With a well thought-out plan, you can achieve anything you set out to do.
If you need help getting started, here is a link to FREE Budget Tools: thebiweeklyadvisor.com/get-your-free-budget-tools/. QCBN
By Steven Calabrese, CPA
Steven Calabrese, CPA, is the CFO of West Yavapai Guidance Clinic. He also is the owner/operator of a website known as thebiweeklyadvisor.com, where such topics as budgeting, investing, paying off debt and goal setting are discussed.