CHAPTER 1: MAKE A BUDGET - AND LIVE IT

No Matter Your Age

Regardless of age, everyone and I mean EVERYONE needs a budget.  It is the absolute foundation on which all other financial actions and plans depend. 

Why?

Because: how can you save when you do not know how much you spend (or make??)?  And ultimately, the most probable way to successful investing is to approach it as a supplemental step to the process of saving – that is, paying yourself by creating a surplus of funds to set aside for your use in the future from your income stream today, and doing this on a constant basis. 

How Do I Do That? 

It is not rocket science: all you have to do is spend less than you earn!  But ask anyone and 99% of the responses will be “that’s hard!”.  And it is, because human nature hates delayed gratification!   

Here is why everyone needs a budget.  It becomes your roadmap or touchstone to help with the day-to-day choices of whether to spend or not.  You can build it specific to your situation and it can evolve as your financial circumstances change (like losing a job, starting a family, buying a home, etc. etc).  Without being too lofty, it is the key tool to create the discipline to save for a future goal vs accepting immediate reward.

Tools Required

There are any number of tools available to build a budget.  The key ingredients require no props beyond pencil & paper: it is creating the awareness of what you spend along with knowledge of what you make.  Monthly buckets and categories are excellent ways to organize this raw information.  Regardless of the tools you use, the hardest part is coming to terms with what you spend, and I mean really challenging the reason for each purchase. 

How to Start? 

I suggest manually listing every purchase or expenditure made for 3 months – and no cheating!  This list needs to be complete right down to the coffee purchased each morning.  At the end of each month review each line critically as to “why” it is necessary, that is deciding what is required and what is nice-to-have.  Especially if you find after this 3-month exercise you have spent more than you earned, then this process will lead you to the choices you must make to create that regular surplus you set aside as savings for paying yourself. 

Paying Yourself

How much should you “pay yourself” each month?  It depends since everyone’s circumstances and discipline levels are different.  If you have never run this process before, shoot for 5% of after-tax income.... that will most likely be a very stiff challenge.  Pre-retirement Boomers like me should do much more than that – I have a friend that saves 30% of his income so he is a discipline maestro!  The key is to start and persevere.  It does become easier, especially as you achieve the goals discussed in Chapters 2 – 4 and you enjoy the positive reinforcement of reaching those milestones.