Building Wealth #3 – Make a budget to be wealthy

If you’re new here, we at cheapskate investing have one basic rule for building your wealth – Spend less, earn more, invest the difference. However, how do you know what the difference is? Do you know exactly how much you can afford to invest each month? You’ve probably heard the saying “pay yourself first” (and if you haven’t, take note). But what if you pay yourself first and you run out of money before the end of the month? The answer to these problems is – a budget. You wouldn’t expect to bake a cake without knowing the exact measurements of ingredients and the cooking temperature. Neither should you expect to build wealth if you have no idea where your money is being spent. In this article, we talk about the benefits of having a spending budget, how to get started and share with you the template we use to do it!

As always, the following is not financial advice, read our disclaimer

“A budget is telling your money where to go instead of wondering where it went”

– Dave Ramsey

Why you need a budget

Hopefully, the opening paragraph has already convinced you that you need a budget but We’re going to breakdown exactly why budgeting works, so that you will be motivated to stick to it. It goes without saying that wealthy people are in the minority. You know who else are in the minority? People who stick to a strict spending budget. Coincidence? We don’t think so. We’re not saying budgeting alone is going to make you wealthy, but you will significantly increase your chances of building you wealth if you do. You’re more likely to build your wealth, if you know that your wealth is building or not and that’s exactly what a budget is for. Obvious right?

Data doesn’t lie

The first reason having a budget will help you build you wealth is because it is written down in hard facts, right in front of your eyes. You cant hide from it. When you keep your finances all in your head, your brain does a funny thing. Your brain will convince you that that latest purchase is not that bad, you’ll pay for it next month, you can cut back next week, there’s enough money in the bank account etc. Spending is a really emotional thing for people. Getting that latest gadget and making the purchase releases endorphins and gives you a dopamine hit. Couple that with your brains tendency to play down bad spending habits and you’ve got a really potent concoction that will seriously skew the figures in your head. Ever get tot he end of the month and wonder where the money went?

Know where the problems are

Do you know exactly what your biggest expense is? If you do great. A common answer to this question is – my mortgage payments, which makes sense and usually takes up 20-33% of your monthly take home. The thing is, most of the time, these people are wrong. Believe it or not, most of the time peoples biggest expense is food. “No way” I hear you say, I spend only £X a week on my shopping. In that case, I challenge you, budget just £X a week for food for your family. I promise you, that figure at the end of the month will be wrong. all those stops in Starbucks, takeaways, food at work, trips to the shop etc. These all add up more than you think and a budget will expose this. If done correctly, your budget will show you exactly where all the money is going and will show you where you can cut back on.

Stay out of debt

Sticking to a strict budget will ensure that you always stay above the red line and hopefully never have to take on short term debt again (debt free is the shortest route to wealthy). You’ve made a budget, but your spouse suggests a new piece of furniture. So you check the budget, but oh no, there’s no budget remaining for a new piece of furniture. you’ll have to save up and budget for it another month. It’s not you saying no, it’s the budget. You’re more likely to say no to extra spending when something else is telling you its a bad idea.

How to budget

Before we get into the actual budget temple, some things to bear in mind:

Keep it simple. The most important thing to ensure you have a successful budget is to make it as simple as possible. Keeping it simple and tracking every single expense will be hard but it can be done. Take a look at our template below for how we track our expenses.

Give yourself pocket money instead of measuring what you’re spending. Some people think a budget it tracking your spending, which is only half the truth. The most important thing is dedicate an amount to things for the month. Once that money has run out, you cant spend anymore.

Do it yourself, don’t do it with an app. Bit of a curveball this one. I know a lot of people like to use apps that link with their bank account totrack spending, however in our opinion, spending just 20 mins a allocating funds yourself every month will ensure you know your finances inside out and will help you challenge your spending more.

Step one: List your income and outgoings

It’s time to start listing all of your income streams and expenses. BE THOROUGH. The more accurate and honest you are at this point, the more successful you can be at answering your money problems. Magazine subscription? In the budget. Do you get child benefit? In the budget. Coffee 3 times per week on route to work? In the budget. Here’s an example template the WE ACTUALLY USE to create our monthly budget.

This is an example budget for 2 earners in a family household. As you can see in the example above, we’ve listed income in the blue section and outgoings in the red section. Outgoings are broken down into 4 major categories – debt, outgoings, motoring and other. We like to list debt in its own category as its a particularly damaging part of our finances. Some examples of how we list expenses – Need to buy tyres for the car next month? Paid for in the ‘other’ section from the regular outgoings. That coffee you buy 3 times weekly? Makes up part of ‘pocket money 1’. Receive Child benefit? Goes down in ‘other’ in the income section. Everything else is pretty self explanatory. The template automatically calculates the average monthly expenses when you fill in columns listed ‘Jan21, Feb21, Mar21 etc’.

Step 2 – Fine tune every month

You’re not going to get your budget absolutely perfect first time. You will more than likely overestimate or underestimate some aspect (usually the amount of pocket money or leisure funds you’re going to need). If you run out of money for a particular thing half way through the month? Add more next month. Have more left over than you thought? Adjust accordingly. After 3 or 4 months your budget should be accurately representing your monthly expenditure. Note – we have a regular expense of £200 in ‘other’ in the regular outgoings section. We think it’s great practice to put some money aside each month into an easily accessible account which you can build up for emergencies or pay for irregular expenses.

Step 3 – Reduce the reds, increase the blues

Your main goal here is to increase your surplus as much as possible. It’s this surplus cash that we will use to sow the seeds of wealth. In order to do that, you need to reduce your outgoings (red section) and increase your income (blue section) as much as physically possible. Start by going down the list and take note of the expenses that you think you’re paying to much for. Think your gas bill is higher than it should be? Use less and shop around for a better deal. Spending more on pocket money than you thought? Try reducing your pocket money for month and see how it goes. It’s better to do this gradually. If you try and cut your expenditure in half in the first month, you’re likely to fall over. So try reducing your monthly outgoings, especially your leisure and food outgoings, slowly so that any changes are felt less and are more likely to be permanent. Increasing your income is much harder to do as most people are working a job with a steady income but there are still things you can do immediately. Some ideas to reduce your outgoings and increase your income:

  • Re-mortgage for a better deal
  • Reduce your energy use
  • Shop at cheaper shops
  • Move debt to a 0% deal
  • Ask for a raise
  • Change to a higher paying job
  • check if you’re entitled to any benefits
  • Sell things on eBay

If you can implement the above steps and stick to them rigidly you will be well on your way to increasing your surplus cash. To find out what we do with our surplus cash to take us further on our wealth building journey, head on over to our investing section HERE

Next Up…

Thanks for reading! Click on ‘next post’ below for the next instalment of our wealth building guide.

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