Most people don’t manage their income. This is not good at all. Some people do try to manage their income by budgeting. This typically means that you look at what your income is likely to be. You subtract mandatory expenses. Then you make spending decisions based on what’s left. But making simple mental calculations is not the best way to manage money. If you do it very conservatively, you may keep up with expenses. But it’s unlikely you’ll ever have money left over for saving and investing to increase your wealth.
Create a realistic monthly budget. It only takes about 1 hour the first time you sit down and make your estimates and about 30 min. each month to keep it up to date.
1. A commitment to wealth-building
You have to commit to building your wealth. Allocate and segregate some money, even it is a small amount, first. The best way to do that is with an automatic withdrawal order that goes into a savings account. Don’t mix your wealth-building fund with other accounts. Don’t use this money for any other purpose than saving and investing, including emergencies.
2. A Start-Over-Again (SOA) fund
Your SOA should have 12 months’ worth of living expenses.
After your allocation to your wealth-building fund, put another amount for your SOA aside and again into a separate account. Your SOA will be substantial and may take a while to accumulate the amount determined.
3. Necessary expenses
Necessary expenses include housing, utilities, basic food, basic clothing, and basic transportation. Estimate all your necessary expenses on a monthly basis and add 10% to allow for any errors.
4. Anticipated necessary expenses in the future
There will always be additional expenses that you know will occur in the near term. It would include such things as a new TV, renovate the house, a piece of new furniture or simply presents for and any type of gifts.
5. Your Fifth Priority: Unnecessary Expenses
Your unnecessary expenses include everything else that you expect to spend in the following months like entertainment (including cable TV/Internet and the occasional trip to the cinema), meals and drinks out, sport, travel, and hobbies.
6. Adjust your budget monthly
Schedule time at the end of each month to plan the following month’s budget. Try to think about what could be different from the previous months like hosting any dinners or parties, more driving or traveling etc.? But as you have already created a realistic overall budget, the next months should not differ too much form the current and previous months. You should expect just smaller adjustments and minor surprises.
Sven Franssen