Budgeting! The very mention of it makes us wince. Why? Well, I Think it's because budgeting confronts us with just how much money slips through our fingers - and with how little we have to show for it. But that's one of its purposes - getting the jolt is good for us.
Budgeting encourages us to take a disciplined approach to spending and saving, enabling us to reach short, medium, and long-term goals that otherwise might prove unattainable. It helps us find extra money to invest, or to pay for a holiday. Budgeting is the most important and effective tool for getting our finances under control.
These are big claims I know, but have you ever heard of a successful business that doesn't have any plans? I'm sure you haven't, because businesses without plans don't last very long. And, in business, at the heart of every plan is a budget.
A business's budget is designed to maintain financial control and to prevent money being wasted. These are the same as your goals, so you have to treat yourself like a business. After all, you generate some pretty big figures too. The current average adult, full-time people wage of just over $43,000 per year multiplied by a working life of 47 years (from 18 to 65) works out at around a hefty $2 million in today's money. Yet, there are many people who, after a lifetime of work, end up with little more than the home are living in - if they are lucky. Having a budget is the first step towards ensuring this doesn't happen to you.
Even people earning very good money never seem to have any. That's because they, like all of us, have a tendency to spend about 10% more than they earn, no matter what their income levels are. I have some very well-paid clients who say the solution to check to their lack of funds is to earn even more than they presently do. That's wrong. Chances are they will overspend any increased income they receive. In fact, some people who know they will be receiving a pay rise in December start spending more in July just to get used to the feeling of it!
What do I say to these people? I tell them to do a budget, find out where all the money is going and then cut back on the least necessary areas to the point where not only does their income not exceed expenditure, but there's actually something left over to save. This is what budgeting is all about.
Key Thought
The budget tells you where your money is going, where you can cut back and where you can save.
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