Financial literacy does not come to everyone innately and it is not taught in school which makes it even harder to access. Lots of financial difficulties an individual might face are from a lack of knowledge or that they even have a lack of knowledge. It's not until you discuss money with others that gaps in knowledge become apparent. Discussing finances is quite a faux pa in society which exacerbates the problem. It's easy to assume everyone has a good grasp of money and how to handle it but over the course of being in the workforce discussing finances I have come to learn that is not the case.
Balancing a budget is always step 1 or at least creating a budget is. If you make $2000 a month but spend $2500 a month you are going to have a bad time. Knowing how much money you are bringing in is quite simple, especially if you work a constant 40 hours a week or are on salary. Being a contractor with an unstable income will make it difficult but you should still have a rough estimate of what you on average bring in.
Expenses on the other hand are much more difficult and time consuming to calculate. Estimating to the best of your knowledge will give you a rough estimate of how much you should be saving on a monthly basis. Tracking actual expenses month to month is time consuming and annoying unless you already need to keep track of expenses for business reasons. The simpler way is to adjust your monthly budget based on actual bills and average credit card bills then track your net worth.
Creating a Budget
Create an income column adding all forms of income (salary, rent income, side hussle) then do the same for expenses which mostly likely have much more lines. This should include, rent or mortgage, debt and credit cards, insurance (car, house, life) debt payments (student loans, line of credit), extras like date nights, subscriptions, etc. Add your income and minus all the expenses to see how your current budget is working. The budget should be a living spreadsheet and you should not be afraid to adjust your budget spending plan and find expenses to cut, like subscriptions.
Hopefully you are bringing in more than you are spending and if not finding expenses to cut will be needed to at least be break even. There are two ways to save more per month. One is making more money by either finding a better paying job or working more hours, the other is to spend less. Cutting expenses is much easier as everyone is working their highest paying job possible and normally works the highest amount of hours they want. This leaves one option of cutting expenses. Everyone can cut expenses no matter what situation they are in. You can always find cheaper food to eat, cheaper place to rent, wear cheaper clothing and find less expensive entertainment.
Spending Plan
Budgeting and cutting expenses is not popular or fun so it should be looked at as a spending plan. Spending plan views budgeting in a more positive light where you pre plan your expenses in a budget so that you don't feel bad or guilty for buying Starbuck everyday. If you want to eat out for lunch everyday, that is fine as long as it fits into your budget. You cannot have your cake and eat it too though. You cannot expect to be saving money each month and buy everything you want. A great way to force your hand to not spend, is to assign automatic deposits into your investments, just like a bill. It can come out once a month leaving you with less money to play with and thus helping your budget and spending.
Net Worth
Tracking your net worth monthly will give you multiple benefits. One is letting you know if your estimated budget is truly accurate by comparing your estimated savings to your actual savings, the other is tracking your investments to see how they are progressing which will set your mind on the future to hopefully motivate you to save in the upcoming month.
Tracking net worth is quite easy. Simply list all your accounts and debts including credit cards, student loans and investments. Then add them all up. You can even add in assets like a house to see how your assets are appreciating or depreciating in value. Doing this month after month and year after year will give you a history of your finances to then look to the future and help you adjust your lifestyle according to your financial goals.
If you are saving on average $1000 a month you would be safe to assume you will be saving $1000 a month in the future which will allow you to then extrapolate into the future. If you want to retire at 65 you may realize that $1000 a month is not enough for you to reach your goal or you may realize that you are right on track. Luckily your investments should be helping your net worth go up passively and it should be granting you a larger and larger return the closer you get to retirement. It is also safe to assume your salary should increase with time allowing you to save more per month if desired.
Budget is always step 1. You need a plan. It is difficult to save if you have no clue how much you are saving. One does not accidentally fall into success or wealth. It is built slowly, dollar by dollar, month after month. If you fail to plan, you plan to fail as they say. A simple 20 minutes a month can make thousands of dollars of difference after 30 years and just like a plane being slightly off course without adjustments and corrections being noted via a Budget and Net Worth you won't know if you are off target by miles until it's too late. We cannot go back in time, we can only look forward.
If you found this helpful or would like help budgeting or investing please email me at TaylorMckeeCoaching@gmail.com
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