It was bound to happen eventually. I know many were hoping we could avoid the subject all together. Even my father commented that he's wealthy and has never made a budget in his life. (Hope!!)
However, when I asked him how, he simply said that he's always made more money than things he wanted to buy.
...I'm taking a guess that situation isn't really going to resonate with many of you...So alas, yes, we are here today to talk about budgets.
There are 5 steps to creating a budget that you LOVE and helps build wealth:
1. Debunk The Budget Myths
2. Get Your Head In The Right Spot
3. Leverage Technology to Do the Heavy Lifting
4. Be Selfish & Pay Yourself First
5. Spend The Rest...All Of It
Today we will tackle the first one:
Step One: Debunk The Budget Myths
The thing with budgets is, they get a bad rap. In fact, I think budgets have got to be one of the most misunderstood tools in the personal finance tool kit.
If we were in a traditional classroom, I would invite everyone up to the chalk board to write down what comes to mind when they think of budgets/budgeting. I imagine it would look something like this:
This makes me sad, because everything above is false..except helpful, they are helpful.
Myth 1: Budgets help you track your expenses
Never want to be wealthy? Then keep focusing only on your expenses.
Budgets have 4 parts:
1. Income
2. Taxes
3. Goals
4. Expenses
If you've only been looking at expenses, you've been missing the majority of the puzzle. Also, with the exception of taxes, you've been spending time on one of the least fun parts too.
Wealthy people make sure to look at the whole picture. There are techniques you can use to manipulate all of these items every month - even taxes. Getting creative on all these elements is what makes budget building a fun exercise.
Myth 2: Budgets make sure your expenses equal your income at the end of the month
This is my favorite myth. People think budgets are a way to balance their financial life, much akin to a see-saw with income on one side and expenses on the other. Now that we know there are more than 2 sides in a budget, this simile is no longer accurate.
Secondly, it's frustrating as sh*t.
Why would anyone want their financial life to resemble a perfectly balanced see-saw? IT DOESN'T GO ANYWHERE! It just goes up and down, up and down. Sound like your current financial situation? Perhaps this is why many people get frustrated about finances; they never feel any momentum. Remember, wealthy people are always moving forward. They never strive for balance and they always want the income side to overwhelm taxes and expenses.
A properly built budget will get you off the see-saw and into the financial Ferrarri - and that is a much more fun ride, I assure you :)
Myth 3: Budgets help you know what you can afford
If you only focus on what you can afford today, you will never be able to afford what you want tomorrow.
You see, when properly used, budgets are a way to afford anything you want.
There are 3 ways to fulfill the "anything" part of the above:
First, stop planning your budget based on what you did last month. Hey! Last month, you weren't wealthy or you wouldn't be reading this blog! Budgets are forward looking and in the future, you can do, buy, or behave any which way you want to get what you want.
Second, now that you know you can manipulate income, taxes, and expenses as part of your budgeting process you have full financial freedom to set & achieve any goal you like. Want to buy a boat, then move around the variables until it happens. Make more money, spend less money, or give away less money to the government.
Third, just in case you forgot Lesson #1 already, don't plan your budgets on what the "average" person or family spends in a given category. Many budget apps & software programs do this as a default, but we've already agreed that the average American is broke, so... stop that.
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So there you have it, the budget myths. Now instead of always saying, "Well, we can't afford that," you can finally begin asking the question all wealthy people ask when making budgets...
"How?"
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