Simple Budgeting Practices
Updated: Dec 9, 2021
We've all heard the first step to financial freedom is budgeting, but why is that the case? It's partially because you can't find independence without boundaries. Even the free market only exists within government established limits. Budgeting is your game of life, and if you disregard the board you'll find it'll shrink on you.
Now, I know there are few things less exciting to do than opening a new Microsoft Excel sheet and inputting each monthly expense in random order with no idea how to organize it. Even the readymade templates, as user friendly as they are, are not as fun as a game of Madden on your one day off a week. That's part of the problem, while a budget is personal, it feels like an extension of work, and your job has no right to interrupt your 8th rewatch of How I Met Your Mother so you can estimate how you'll afford insurance, groceries, and a mortgage in the same month.
Despite it being a less than ideal way to spend what little free time this pandemic has offered you, budgeting is vital in giving you peace of mind in your month-to-month payments and planning for future growth. It's not entirely about what you spend, but what you save because those savings grow and help you reach your future financial milestones. It also makes you more prepared for all unforeseen disasters in your life. While operating without a budget makes you a reactor, maintaining proper knowledge of your finances does the opposite. You proactively stay on top of your every problem and can even stop them from growing while they're still small. While the internet is filled with gurus promising you fast results if you buy their course, the tried and true method for growing net worth has usually come down to a proper budget.
So if budgeting has not been for you in the past and you have no idea where to start, like me trying to figure out how to meditate, there is a simple strategy you can implement today, which should not take you longer than 20 minutes. It's called the 50 30 20 rule and was popularized by Senator Elizabeth Warren in her 2005 book All Your Worth.
The basic idea is breaking your after-tax income into three groups: 50% goes to necessities: Examples are rent, insurance, groceries, and anything else you cannot live without.
30% is assigned to wants like streaming services, video games, lego sets, and other devices that make your life worth living.
And finally, 20% is used for paying off debt and savings. This percentage is probably the most crucial dimension to the strategy, and if you have no current savings, it's the first area you need to address. You're far from alone; even pre-covid 41% the Americans couldn't secure $1000 in an emergency (https://www.cnbc.com/2020/01/21/41-percent-of-americans-would-be-able-to-cover-1000-dollar-emergency-with-savings.html)
But it's essential to make this a priority if you have not in the past. That 20% is how you eventually build financial freedom.
You don't have to invest immediately. In fact, it's difficult to with a small amount, but you can save and accumulate capital, and with every paycheck, you invest 20% in your future by not spending it. Eventually, you get to a point where you can access the market and take on less risky strategies like dollar-cost averaging an index. Between paying down debt and building capital, you'll enter a world of opportunity you didn't have access to before, where you can make substantial purchases to move up your economic class. Investments like building a home, a car, or investing in education become accessible.
While budgeting can be intimidating, there are basic steps most people can take on their own, and this simple strategy is accessible to most. Building net worth is a long term commitment, but life is long too, and it's essential to make sure at least a portion of your present self is investing in your future.
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