So you want to build a financial fortress, eh? You want to be financially independent. You want to be rich. You want to have enough money to do whatever you feel like doing. You want to be able to retire with dignity. You want your kids to be able to go to college. You want a nice home. You want to travel the world. You want to be financially secure.
THEN YOU NEED TO LEARN TO BUDGET MONEY.
In Thomas Stanley’s outstanding book, The Millionaire Next Door we find that millionaires (those with a net worth of at least one million dollars) budget their money.
“Why are Mr. and Mrs. Rule millionaires today? Because Mrs. Rule plays tremendous defense! She is responsible for budgeting and spending for both her household and their business. Is anyone in your household responsible for budgeting? All too often the answer is “not really.” All too often people allow their income to define their budgets. When we tell our audiences about the budgeting and planning habits of the affluent, someone always asks a predictable question: Why would someone who is a millionaire need to budget? Our answer is always the same:
They become millionaires by budgeting and controlling expenses, and they maintain their affluent status the same way.”
Often people will tell me, “Well, I want to be rich so I don’t have to worry about money.” That’s like saying you want to be fit but not worry about what you eat. You became fit by sticking to a regimen of quality food and consistent exercise, and the only way you can stay fit is by maintaining the status quo. So if you equate budgeting with “worrying” about money then you will be broke (out of shape) – forever. Budgeting takes the “worry” almost completely out of the equation.
When you learn to budget money you learn how to “play tremendous defense.” This is absolutely crucial. Let me re-phrase that. This is critical.
Examine the following two people and tell me who is in a better financial position:
|Person A||Person B|
|Earns $90,000 per year, invests about
$3,000 per year in the company
401k plan. Carries about $8,000 in
credit card debt. Has no idea how
much they spent on food, clothing,
|Earns $60,000 per year, invests $3,000 per year in
the company 401k plan, plus an additional $6,000
(15% gross pay invested for retirement) in Roth IRAs
for both spouses, does not carry credit card debt.
Could tell you at any time how much they spent
on food, clothing, utilities, and any
other major household purchasing category.
Why is it that Person A, who is making $30,000 more per year, invests less in retirement and carries credit card balances? Person B learned to budget money. Person A still needs to learn.
Person A is on the fast track to nowhere, as far as finances are concerned. This is a pretty typical picture of households these days. Sure, they make a good amount of money, but what do they have to show for it? If they could learn to budget, money would be plentiful.
Is the Person B situation realistic? Of course it is! It’s just not common. Those are two vastly different ideas though. Most people in America are broke – or at least on the verge of it – living paycheck to paycheck, hoping that somehow their financial situation will change. Yet they refuse to actually do anything about it.
Budgeting is the bedrock for your financial foundation because it enables you to do things with money that would not have been possible before.
Learn to budget money and expect the following:
- Debt-free living
- Increased cash flow (it’s like getting a raise)
- Growing retirement investments
- Ability to give to worthy causes
- Money for kids’ college
- Paying cash for cars, boats, dishwashers, washing machines, etc.
- A dramatic if not complete reduction in marital arguments regarding money
I’d like to discuss #2 for just a second. When you learn to budget, money seems to go a bit further. When you have told your dollars where to go before the month begins, it’s as if those dollars work a bit harder, and more efficiently. You will truly experience a sensation akin to receiving a raise from work. Your cash flow increases. It’s one of the fundamental laws of the universe: objects in motion will remain in motion, and budgeting increases household cash flow.
Your financial foundation can only be built once you have learned to budget your money. You may see fancy homes, fancy cars, name-brand clothes, or any number of “status” symbols, but know that so many times, that “fortress” you see has little to no foundation. The slightest financial storm will send it tumbling to the earth. Begin at the bottom and work your way up. When you budget, you’ll free up avenues you never thought possible before. These avenues, when explored, will allow you to not only save more money, but also earn more money in the long run.
Let’s suppose a friend comes by and asks if you want to invest in a great piece of property at a bargain price. If you have learned to budget, money will be available for you to invest in such a venture. Your risk tolerance may usually be low, but when you have money to spare, your risk decreases to almost zero. However, if you need to borrow money to invest in the property? You have increased your risk exponentially and should, therefore, not enter the deal.
Remember, budgeting is a means to an end, not the end in itself. You can explore a whole slew of articles about how to learn to budget money throughout this site. Also, following YNAB’s Four Principles of Cash Flow Management will take you a long way towards building your financial fortress.
Budgeting is in.