The Budget As Cornerstone For Wealth Building

If I had to choose a single task that facilitated increases in my financial wealth over the years it would have to be the fact that I created a monthly budget and stuck to it. All of the other things that I’ve done to build wealth, including saving, investing, increasing my income and keeping my lifestyle in check, have surely contributed to my increase in financial wealth. But it’s the budget that’s held everything together.

Before I had a budget written out (typed out actually in a spreadsheet) money came and went willy nilly. Some money went here. Other money went there and rarely did I know why. Some months I saved, invested and paid down debt. Other months I didn’t. At that time any progress that I made in terms of wealth building was slow as molasses. A budget is easy to create. The power of the budget is not so much in the list of budget items themselves but in the fact that a budget causes you to make deliberate decisions regarding how money is spent.

Once you start telling your money where to go then YOU are the one in control of your finances instead of the not so good friend many of us have called CHANCE. Good ‘ole Chance sometimes does right by us but most often lets us down when it comes to finances. When you create your first budget you are showing Chance the door and taking control of your finances. While I’m a cheerleader for getting started on a budget right away there is one step that many people need to take prior to creating a budget. That step involves listing your debts.

Your debt list is critical for a couple of reasons. First off, your debt service (the amount that you need to keep up with your payments every month without falling behind) is going to be a key line item in your budget. Second, getting your debt organized will be a key factor in paying off the debt so that eventually the line item in your budget for debt service is ZERO!

Your debt list should include a line for each company (bank/credit card, etc.) that you owe money to, and include the total balance and the minimum monthly payment for each debt. This is exactly what I did over twenty years ago when I had about $30,000 in debt spread between several credit cards and a car loan. The total of the minimum monthly payments was added to a line item in my budget that I called Debt Service.

As far as the actual budget is concerned start at the top by listing your take home pay (the actual amount deposited into yout bank account from all of your pay from work for the month) and then below it list all the other costs that you incur in the average month. Subtract the costs from the take home pay and at the bottom you should have some amount, whether it’s a positive or negative dollar value. Below is a basic example using made up (but somewhat realistic) numbers.

It’s important to note that the first try at the budget is meant to indicate what you’re actually spending each month and that will require a good review of your bank and (if applicable) credit card statements. The second pass at the budget will involve how you want to spend going forward. In the sample budget above there’s a good amount of room left at the end of the month. The next questions to ask are the following.

• Where is that extra money going?
• Where should that extra money be going?

From my perspective the extra money should intially go towards a combination of cash savings (in a case where you don’t have cash savings for emergencies) and debt elimination. How much cash savings you should hold at a given time and how aggressive you should be in terms of paying down debt are sources of great debate and deserve their own posts. For now just focus on the value of creating both your debt list and actual monthly budget. These are the basic (but fantastic) tools that you will use to start building wealth.

One other question I know that people might have is this. What if the Net Remaining amount above is a negative one? That’s a critical situation because it means that you’re likely going further into debt every month to stay afloat financially. In that case you should be asking yourself the following two questions.

• Where can I reduce spending without sacrificing necessities?
• How can I increase the amount of income I take home every month?

As with emergency fund savings and debt repayment these are more complex issues that deserve their own posts. For the moment it’s important to ponder those two questions because the answers to those could change your monthly financial outlook in a very positive way.

Once you get your financial house in order with a budget that has a good amount remaining every month you can move on to aggressively paying off debt, and saving and investing. That’s when things get exciting. And since that’s a place that I’d like you to get to I hope that you take this advice on creating (and sticking to) a budget to heart right away.