My prior post regarding the virtues of attaining financial literacy has energized me to go deeper into the basics of personal finance so that you may benefit from my experiences (including failures) regarding wealth building. Briefly, in my mid-50s I have a net worth approaching $2 million having started from scratch and received no inheritances or large gifts from anyone. I’m 100% debt free and living in a condominium that I own outright. Honestly, 10 years ago (immediately following a difficult divorce) I couldn’t have imagined that I’d be in this financial position, which I’m very happy with. If you would like to know how I got here then please read the next few posts which will be on the topic of personal finance and wealth building. The focus of this post will be the cornerstone of wealth building and that’s your monthly budget. A monthly budget is not a sexy or exciting financial concept for most people. Most people consider a budget to be a financial albatross. Then again, most people are not achieving their financial goals…if they have financial goals at all. This is supported by data from the 2023 Federal Reserve Report on Economic Well-Being of U.S. Households which revealed (here) that 51% of adults do not have the cash to cover a $400 emergency expense and that 52% of adults have less than $2,000 in savings.
A good monthly budget that you stick to is the cornerstone of a solid financial plan and a successful financial future. A budget is not a financial albatross. Quite the opposite. It’s a road map to wealth. Follow the budget and you’ll find success. Go off the map and who knows where you’ll end up. People who live without a budget often find that they’re confused as to where their money is going. Eventually they get frustrated with the lack of control they seem to have over their money. This can turn into a vicious cycle where a person who is frustrated decides to avoid really looking at their finances for fear of what they might find out. Which only makes the situation worse. After a certain amount of time things may get so bad that a person either has a breakdown or a break through. I had the latter over 20 years ago. What I know now is that neither of those situations need to occur as long as you embrace the idea that a budget is important and get to work on one. Budgeting can be quite complicated as life becomes more complicated. That’s a great reason to start a budget when life is simple because the practice of maintaining a budget when life is simple and the numbers are small will make maintaining that budget much easier when life is more complicated.
You really only need to know three things at a high level in order to create a budget. First, the amount that you regularly take home after deductions from your pay such as taxes, health insurance premiums and retirement plan contributions. This number is simply known as take home pay. Second, you need to know what the total cost is for all of your critical expenses which are basically the expenses that keep a roof over your head, keep food in your pantry, keep the utilities on and get you to and from work. Third, you need to know what you’re doing with the difference between take home pay and critical expenses whether there’s extra money or you’re short money every month. If there’s extra money you have room to either pay down debt or save and invest. If you’re short money then your first order of business will be figuring out a way to create a surplus. This can be achieved by increasing your take home pay, reducing your expenses or both.
Below is a sample monthly budget which encompasses the key items I noted above. The numbers are examples only and the budget is simplified but it’s a great start for anyone who so far has no budget at all.
| Item | Amount |
| Take Home Pay | $4,000 |
| Rent | -$1,000 |
| Electric | -$100 |
| Gasoline | -$100 |
| Internet | -$50 |
| Cell Phone | -$75 |
| Groceries | -$500 |
| Entertainment | -$500 |
| Car Payment | -$500 |
| Student Loan | -$500 |
| Remainder | $675 |
In this sample budget the person has two key debts, their car and their student loan. They know what the payment is for each every month. You might have other debts though that are variable, like a credit card. My best advice if the fictional person above has a credit card is to put as much of the $675 that’s left to pay off the credit card. If anything is left after that then that money can be put towards savings and investment. Unfortunately many people have been conditioned to try to play around with debt while simultaneously saving and investing. The logic typically goes something like this. “Why put too much into savings when I can always use my credit card to cover an expense in a pinch?” Following that logic why build any wealth at all, when you can lease things and build up your credit to cover all sorts of expenses with a credit card when you need to? The answer to that is simple. Credit card money is expensive to use and most people who use cards religiously will eventually hit a wall where their credit is maxed out and their interest payments alone exceed what they can afford to pay each month.
I’ll put the above credit card argument to the side for now and just let you know that your initial budget goal is to get as accurate a picture as you can of your monthly take home pay and spending. That means if you’re spending from say a debit card and a credit card that you consolidate the categories from each card in your budget to get a true picture of how you spend money. So if you put a restaurant tab on a credit card then you’d add that amount to your Entertainment category above and include any entertainment you paid for with your debit card in the total as well. You could also get a little more granular and add a restaurant category if you like. Simple is okay though for your first pass at the budget, without being too simple. After you have that picture you want to determine what, if anything, you have in surplus that could be used for debt payment or savings and investment. Ultimately, and this could take many months, you want to get to a point where debts are not a factor and savings and investment is the focus.
To get to that point where savings and investment is the focus you simply need to practice the discipline of working on that budget for months. While you’re doing that it’s important to remember the big why of this process that you’re engaging in. It’s to get to that successful financial future. If you forget the reasoning behind any long-term goal then there’s a really good chance that you will abandon the goal before you reach it. So being serious about creating your budget and then sticking to that budget are critical to long-term success. In the interim you may strike it rich in a big way. It happens for some people. In case that doesn’t happen you will have a plan to get you to wealth and knowing that you’re working such a plan may just give you the confidence to follow your road map to wealth.
Now that you know something about budget basics in my next post I’ll focus on the basic banking products that will act as the foundation of your wealth building strategy. Till then if you haven’t already, then get to work on that budget. And even if you have a budget already perhaps it’s time to fine tune it to ensure that the budget is accurate and serving your long-term financial goals.
In The Midst Of A Journey 