This is the first in a series of six articles that cover how to create a budget. Many people find doing a budget to be a difficult task, but in this series, we walk you through the process in a very detailed way. Just follow each step and by the end you’ll have your budget up and running and be on the road to financial freedom!
Before getting to the question is it necessary, let’s ask something more fundamental: do you know what a budget is? We just hope your answer was not, who cares? Or that you immediately started to tune out. This is an important question and the answer is: A budget is the most important component of your plan for financial freedom.
Did you think we were going to say a list of income and expenses? Most certainly, this is what it is NOT. Many times when you ask someone if they have a budget, they respond by saying they earn X per month and they spend Y, so they save Z. Actually, if we get this response we’ll probably be impressed. But there are big problems with this thinking.
A budget is a plan. It is a plan to deliver a targeted level of savings each year. The accumulation of these savings provides for your long-term financial peace of mind.
Most of the times we have to fit our expenditure within the income we earn. Only a few people earn enough income that covers their desired lifestyle and have sufficient surplus to achieve long-term financial security. This website is not for those people. This website is to help people who have to make financial choices within a certain income level. Without making those choices, the targeted audience of this website will struggle to achieve long term financial freedom
Why might someone think a budget is a list of income and expenses? We believe this is because the first time a person takes the time to identify, in detail, his or her income and expenses, it’s like a revelation! And having this info is empowering, so they forget that just knowing what we spend or earn is like jumping in a taxi from San Fernando with your ultimate destination being Port of Spain, but along the way you discover shopping at Grand Bazaar. You get excited and you forget you needed to head much further!
Identifying your income and expenses accurately is just a stop along the way; don’t get distracted!
No Budget? What’s the Big Deal?
While we’ve emphasized how integral a budget is for your future financial peace of mind, it may be useful to spend a few seconds thinking about what happens if you don’t have a budget:
- You tend to live month-to-month i.e. paycheck-to-paycheck
- You have debt, usually too much
- You usually have a monthly credit card balance i.e. it’s not paid in full every month
- You usually have a very low level of savings, if any at all
- Every big expenditure is a “crisis”
We can continue, but you get the picture. Put simply, you are continually faced with money worries and are regularly stressed out.
My personal story is I had just started working after completing school and I got my first credit card: TT$1,000.00 limit – I’ll never forget. I felt rich! Firstly, why did I need a credit card? Because every month, I’ll run out of money by the third week or so of the month and my Mom would need to hit up her friends or family for a small loan to tide me over to the next payday. I got tired of “begging” and applied for a credit card instead.
Anyway, my next few month-ends followed this pattern: I got paid around let’s say the 26th of the month, and as usual, the first thing I did was pay off my credit card, pay the monthly bills that were due etc. This took 2 to 3 days, so around the 29th, I would be broke. Meaning the next month had not even started, but already I had no money, so I just used my credit card.
Like I said, this was a pattern and one month-end the realization hit me: I just got paid, yet I ALREADY HAD NO MONEY. Your pay is meant to cover your next month’s expenses, but here I was paying off OLD expenses, and I had no money to cover expenses until my next pay check. So yeah, I was the very definition of living paycheck-to-paycheck.
Does this resemble your situation? Or does it sound like something you’d like to avoid? Then let’s work together to fix it. Read on to the next article in this series, Gather Data for Your Budget.