Budgets were supposed to help us stay on track, but there is another way that's not only better but also more effective.
A budget in the most simplistic sense is an outlay of your projected expenses over your income. You tally up how much you project to owe towards bills, savings, loans (i.e mortgage, car loans or student loans), and your other expenditures like gas, groceries, etc. Once added up, you weigh it against how much money you bring in and the “goal” is to make sure you have enough money to cover these costs. If you’re under, hurray! You’re spending below your means, but for most people you’re usually over.
If you discover you are over, you start going back over the budget and see where you can cut items to get back in black. Most of the time the budget gets so tight that there is no room for savings after all the expenses and this makes people feel they are either bad or inferior with their money. Now you may be asking, all this looks okay so what’s wrong with budgeting? The answer. You will never stick to it! Guaranteed.
When we create a budget, we scour through our receipts, invoices and our credit cards to see where we have spent our money, and this is okay because it’s important to see past trends and see where exactly your money is going. What most people get wrong is that they believe they can predict what their expenses are going to be down the line and most people are ambitious when it comes to their projections. For example, you say “we spent too much money eating out, almost $2,000 worth. We need to make that $500”. And the examples can go on, but the issue becomes that most people don’t follow their own budgets. Seriously. How many people follow through on promises made to themselves? The answer is most do not. Ahem new year’s resolutions are historically the most unfulfilled promises.
So What Should We Do Differently
What needs to change here is the general mindset on how to deal with money, creating a goal you want to achieve and lastly you need be a conscious spender and follow your spending patterns closely. And you can only do the last two if you follow the first rule.
So, let’s look at the shift in mindset. I think the biggest thing people think about when it comes to budgeting is where to cut costs. While that’s not necessarily a bad thought, it’s a very demoralizing way to look at it in my opinion. What you need to do first is create that goal you are working towards, whatever is may be, and then plan around that. There is a usual consensus that we all either want to be financially free or super wealthy. Now these are two very different tracks and they lead down different roads, so it’s imperative you know what your goal is. Being financially free is NOT the same as being super wealthy. I won’t discuss too much about the super wealthy path and focus more on the financially free path. So, let’s dig into this a bit.
Now that we have a goal in mind, financial freedom, we need to properly identify what it means to be financially free. My definition of financial freedom is having saved or passively earning enough money (aka making money without having to work) where this income or cash saved outweighs your expenses by a sizeable amount and will continue to do so till you die. This situation would mean that you could retire early and not have to work another day. To determine what that number would be in either saved up cash or passive income is entirely up to you and the lifestyle you live. With this goal in place, this is how we shift our mindset.
Once we have our number on how much we need to save up to retire we start paying ourselves. So, what the hell does that mean. Back when we were budgeting, we were trying to cut our expenses. But what we need to do now is learn to pay ourselves first in order to reach our goals. In other words, you decide how much money you will need to save every month to reach financial freedom. And in my perspective, it should be sizeable amount over a feasible period of time.
Once you have that money allotted to yourself, then continue to pay your other fixed expenses. After all that is done, spend the rest however you want to. It’s really as simple as that. The best part about doing it this way is to put your mind in a more positive position. You now primed to save for your financial freedom and whatever you have left after securing your freedom is disposable cash. This is also where conscious spending comes into play.
What You Can Achieve If You Follow This Path
When you start to practice this type of “budgeting” you can train yourself to be more aware about yourself and your spending patterns. It may even encourage you to cut down on other expenses by nature to make the path to financial freedom even shorter. Once you get into this habit you will start to feel as if you have more power over your money and you have a clear goal without all the extra noise. It’ll be more about securing your freedom then cutting back and sometimes even denying yourself some pleasures.
Now I understand that many people don’t have enough money to pay themselves first as the necessary expenses may absorb a lot or sometimes all your income, but there are ways around this and best saved to talk about in another post. In the end however, this method will retrain you to re-prioritize your spending without you even knowing it. This has worked for a lot of people I know, and I can say they are well on their way towards a financially free life.