(Catherine is a guest blogger from Budget Blonde.)
Raise your hand if you want to be outrageously wealthy someday. (Don’t be shy. It’s totally fine if you wave your hands in the air like you just don’t care.) After all, I can’t think of anyone who doesn’t want to grow their wealth and improve their overall financial outlook.
You might not realize this, but the true key to growing wealth is to have an intimate knowledge of your spending patterns, and the best way to achieve this is through budgeting. You’ve likely heard of budgeting before, but maybe you tried it and hated it or maybe you weren't sure how to start. The truth is, budgeting is a lot easier (and even more fun) than it sounds. Plus, once you get the hang of it, you’ll be one step closer to knowing exactly how much money you need to be truly financially independent in the future.
Here’s how to get started:
A budget is only as good as the money you put in it. Anyone can create a really fun $15,000 a month budget, but that’s not going to be most people’s realities. You need to know how much your take home pay is each month. If you’re self-employed, take an average of the past 12 months to determine this. Once you know your take home pay after taxes have already been taken out, you can now move on to the fun part: spending!
The most common mistake people make when budgeting is plugging numbers into a budget that look nice but aren’t realistic. So, in order to not get discouraged about going over budget at the end of each month, it’s important to look at your spending patterns. Pull up your credit card records from the past 2-3 months and use those records to create your categories. For example, you might make a nice, detailed budget but totally forget that every other month, you have a dry cleaning bill. These small extras are what typically break budgets so use your history to help you plan for your future. As you’re looking at your spending patterns, see if there is anything you can improve or cut out.
Related Post: The Frugal Way to Manage Your Credit Cards
If you’re a homeowner, you might have to pay property taxes once a year. Or, if you pay your car insurance one or twice a year, those payments will come up as well. Consider other bills, like dental appointments every six months. Don’t be upset if you forget about one of these bills and it catches you off guard. Simply keep a note of it so that your budget gets more and more accurate each month as time goes on. Some people even allocate categories to bi-yearly bills like insurance to save up slowly for the larger bills as time goes on so the large payment doesn’t hurt as much.
The easiest way to save is to do so automatically. Every month on the first of the month, money automatically leaves my checking account and goes to six different savings goals I currently have. If I decided to wait to save at the end of the month, I know I wouldn’t have any money left over, so having that money automatically do it’s thing on the first day of the month means my savings grows without any effort on my part!
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Once you get in the habit of budgeting regularly and watching where your money goes, you become empowered with your finances. You can use this new found confidence to destroy debt, allocate more money to your retirement funds, or save for some big goals (fabulous vacation, anyone?!) The point is, when you put your focus on your finances, freedom directly follows so don’t be afraid of your budget. After all, it’s your very best tool for becoming outrageously successful with money now and in the future.