The Wealth-Building Power of Personal Budgeting (Part 3)

Build WealthPersonal BudgetingSave MoneyWealth-Building Math

Mar 6

Welcome Back!

Today, in this final post in this series on personal budgeting, we discuss how to avoid the pitfalls associated with personal budgeting and how to overcome them.

We’ll also reveal how to create a dynamic personal budget that helps you make your money work for you and help you achieve your financial plan and build lifetime wealth.

If you happened to miss the earlier posts in this series, click here for Part 1 and Part 2.

Let’s go!

Arthur, what do you think is the biggest mistake people make regarding personal budgeting?

Not making a personal budget in the first place. This is a Fail!

If you don’t have a personal budget, you Cannot get a solid handle on your income, costs and expenses and spending. Then you Won’t Know whether you have enough money – cash – to build wealth or whether you are overspending or going to incur debt or run out of money.

Don’t worry!

Truth be told, after my divorce when I finally got back on my feet, I started building wealth with just $100 and sometimes $250 or $500. I controlled my expenses. Over time thankfully, I was able to increase my income and direct even more money to building wealth on a more consistent basis. But even the early dollars made a difference.

But it took a Number of Years. Glad I stuck with it.

And you should too. . . The results will speak for themselves.

You see, I had been budgeting since I was 12 years old when I entered Junior High School – now called Middle School. My Dad gave me my allowance for the entire semester in one shot. Cash on the barrelhead.

I learned how to budget darn quick! Baptism by fire.

When I got married, I stopped budgeting. I don’t recall why but I stopped. AND that was a Big Mistake! HUGE!

Don’t make this mistake! Don’t let this happen to You!

To explain this further, my wife and I had Different views about money.

In addition, I supported my wife over the years because she wanted to be a stay-at-home-mom. I had wanted her to pay off her student loans Before she stopped working but that was not to be. Her staying home (caring for the children) was terrific relating to raising the children and our family but was Not a good financial decision.

She promised to support me in return when I needed it. But when I lost my job from JP Morgan, she was Nowhere to be found. For me that was the beginning of the end. . .

I Don’t think that even the best of personal budgets would have saved the day.

Looking back though, I should have communicated better or made the effort to; stood my ground and put my foot down. But alas, I did not. And I paid for it big-time. We all did!

To be candid, we probably could have avoided the debacle if I had taken action along the way.

Believe me, I failed and I should have known better.

Even though I stopped keeping a formal personal budget when I got married, I had had so many years of experience with personal budgeting, I had a sixth sense about the state of my personal finances.

In other words, by analyzing my checking account, I had a good feel for whether we wereI overspending and whether our finances were on track. Or Not.

But a sixth sense is Not accurate enough.

Then when finances were tight after I lost my job and still even tighter when I got divorced, I should have started budgeting right away. But I Didn’t, at least not for a few years.

I was lost and ended up grasping at straws for a number of years.

You can learn all about that and how to build wealth in my new book:

10 Easy Ways to Accumulate $1,000,000 Now!

Check it out on Amazon in paperback and on Kindle.

FREE?

You might be able to get the book for FREE or for 99₵ on Kindle.

The paperback edition is $5.95 right now.

Essentially an infinite return on investment. You can’t go wrong!

I tell my story and explain how you can build solid, lifetime wealth, step by step.

What’s the logic behind your comment that it’s a fail not to make a personal budget?

The only way or possibly the most likely way I know of to get a handle on your ability to build wealth is to get a detailed understanding of your income and expenses and spending.

For most of us, our income is Fixed. Our income stays constant during the year. Likely we get a salary and overtime pay. And hopefully a year-end bonus or merit bonus.

Then there’s our spending – our costs and expenses.

Essentially, you Need cash to invest so you can build wealth.

When we chatted earlier, you compared a GPS – global positioning satellite – or really Google Maps or Apple Maps – to a personal budget. . .

I think it’s safe to say that most people use a GPS or the directions App on their Smartphone to get from Point A to Point B.

I use my iPhone all the time, even locally.

Apple Maps and Google Maps generate point by point directions to ensure that we arrive at our destination.

A personal budget works the same way.

A personal budget is really a spending plan that helps us manage our spending and stay on track to make progress towards our financial goals.

And if we take it one step further, if we want to accumulate money to buy a new car or house or build wealth to fund our retirement living expenses, first we have to create free cash and then we have to develop an investment plan.

Point by point, step by step!

The attention to detail – the specific steps – helps guide our journey.

A personal budget functions the same way. Or should.

Arthur, are you saying that your primary and perhaps only way cash comes in the door is from your salary?

Exactly.

And possibly overtime pay.

For a moment, let’s put aside whether you save money off the top – for example through payroll deductions which you contribute to your retirement plan.

Examples include a 401(k) plan or 403(b) plan which helps you build wealth for retirement.

If you spend more money than your after-tax salary – your take-home pay – you won’t have money to invest. Overspending and borrowing – especially on credit cards – make it Essentially Impossible to build wealth.

I think it’s clear but tell us more about freeing up cash flow.

Well, the words are probably simpler than the action steps you have to take to create free cash flow. But here goes.

You have to increase your income, which is the main or only source of your cash inflow.

And control your expenses or reduce your expenses – your spending – in order to create positive cash flow.

Take-home pay is the cash you can invest to build wealth!

Then, income minus expenses equals cash left over for investing.

There’s more to the story but essentially the business community calls this ‘free cash’.

Which you can spend or invest as you like.

◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊

Looking to build lifetime wealth, gain peace of mind and retire comfortably and worry-free?

The Time-Tested Roadmap is to create your personal wealth-building plan.

To multiply your wealth Click here!

◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊<§>◊◊◊

Are you saying that we should cut our expenses to the bone or go on austerity in order to free up cash?

NO. I am not recommending that people automatically go on austerity! At least not universally.

Although going on austerity is sometimes warranted.

Austerity is Exactly what I should have done when I lost my job and my spouse was a stay-at-home mom and then when I got divorced and had to pay for two houses and legal expenses.

You can benefit from my experience and more in my new book, 10 Easy Ways to Accumulate $1,000,000 Now!

But you do encourage people to continually cut their costs and expenses, right?

Yes!

Regardless of your financial position, I do recommend that people continually look for ways to cut expenses and in particular, eliminate waste!

If nothing else, cutting expenses in some areas frees up cash to offset the increase in other costs and expenses – inflation – in other areas.

Examples include the higher cost of food, energy and insurance.

The key to financial success is to manage your costs, expenses and spending. And balance.

Balance is important because sometimes All of us overspend.

Occasions, birthday celebrations and the holidays come around. Back to school.

But the key is to reduce spending during other times of the year so on balance, throughout the year, you have enough cash year-round and achieve your financial plan!

In other words, average out.

Sometimes you spend less than your personal budget allows and sometimes you spend more. But over time, on average you spend an amount you can afford.

If the biggest mistake people make is not making a personal budget, what’s the second mistake?

Not following their personal budget.

Assuming that you actually make a realistic personal budget, this Should become your spending plan!

In other words, a detailed and accurate personal budget tells you how much money you can spend without cannibalizing your money earmarked for investment – wealth-building, incurring credit card debt or running out of money.

And whether you want to take on additional work – for example gig work – to increase your income.

Last month, I had business in Ft. Lauderdale. One Uber driver told me that he sold hearing aids during the week and drove an Uber during the weekends to make extra money to contribute towards his daughter’s college tuition. Nice!

By monitoring your personal budget – really your income and spending – continuously, if your income declines and/or your spending increases too much, you’ll know whether you’re heading for financial difficulty. And you can make changes to your spending as you go.

It’s Up to You to right the ship and course correct – take action. And the sooner you take action the better!

That’s the ticket.

And as I explained, that was my Big Fail when I lost my job and my income vanished and then later on when I got a new job that paid substantially less – 45% less in fact; and then when I got divorced and had to pay for two houses and legal fees for a while.

Thankfully, several years later, I found my footing and starting building wealth again. I share the steps I took in the book.

Let’s throw in the third mistake savers make when they make a personal budget.

That would be using Historical Numbers – for example last year’s spending – as a guide to how much money you can spend each month and in the upcoming year Without running a deficit.

Costs and expenses Change from year to year and often from season to season – seasonal expenses.

Many expenses go up. And some go down.

When you assume that next year’s expenses will be the same as last year’s expenses, depending on whether your income goes up and by how much – by what percentage, your costs and expenses may exceed your income.

Without adjusting your spending – downwards – you may start running low on cash and incur debt. Possibly costly credit card debt.

When you estimate your income and expenses – amounts you will have to spend in the year ahead – you can design your personal budget accordingly.

This is a ‘Dynamic Budget’ or ‘Dynamic Personal Budget’.

Some people refer to a Dynamic Personal Budget as ‘Zero-Based Budgeting’ where you set your spending based on your income. The goal is to spend no more than your income.

This is a very good rule of thumb and will help you avoid borrowing money and help you build wealth.

A Dynamic Budget enables you to adjust your spending on the fly.

Then you’ll Substantially increase the likelihood you’ll spend less than you earn and have free cash to build wealth.

But you are adamant that people should not only make a budget but also follow it too.

Absolutely!

Are you saying that people should never go off track and overspend?

Not at all.

Again, a personal budget or spending plan is really an average, a guideline, a spending plan.

Some months, it’s likely you’ll spend too much. But in other months, you should reduce your spending – discretionary spending – and defer spending in order to bring your money balance back into alignment.

That’s great insight Arthur! Do you have any other insights you want to share?

Yes one more point, for now anyway.

Taking action to get a handle on your personal finances, your financial position, is much better than doing nothing.

And certainly better than spending with reckless abandon.

It all depends on how serious you are about building lifetime wealth!

It’s up to you. The choice is yours!

To build more wealth right now, click here.

See you next week!

Arthur VanDam, CPA MBA

Budget and Grow Rich® – ISSN: 2992-9296 – USA International Standard Serial Number (ISSN)

Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax, accounting or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors!