How Budgeting Leads to Financial Independence
Americans are in an unprecedented amount of debt. Excess credit card usage and student loans are two of the biggest factors in this debt epidemic. These are the most obvious factors, but there is something more subtle at the heart of it all. We don’t know how to save.
The Rich Aren’t Always Rich
Whether you are making $30,000 or $300,000 a year does not indicate how well you are doing financially. People that don’t know how to budget will spend all of the money they make and probably more. If the person making $300,000 is spending $700,000 on vacations, homes, cars, and gifts, he didn’t make $300,000, he is in debt for $400,000. Due to interest, he will be paying a lot more than the original $400,000 cost.
The person with $30,000 a year lives in a small apartment, buys groceries instead of going out to eat, exercises at home instead of paying for a gym membership, spends time with friends at the library, and is only able to save $100 dollars a month. This person is wealthier than the person making $300,000.
The second individual is living a humble lifestyle and saving money for her future. With the positive habits she is developing, it is likely her skills will grow stronger, and she will be able to increase her income. At that point, she can increase her savings and, if she wants to, her lifestyle. Continuing her good habits will compound her results just as her savings will compound over time.
Budgeting to Greater Savings
Spending less than you make defines your progression to wealth and financial independence. Even if you are only able to save a small amount, the habits of saving compound over time to provide greater benefits. The degree to which you can save and increase your savings dictate your acceleration towards or away from financial security.
So, how do we save? It seems simple: spend less than you make. But simple isn’t always easy. Purposefully directing your attention can be a challenge. To budget appropriately, direct your attention to where your money needs to go and figure out where it is actually going. Monitor your expenses. A lot of it is probably unnecessary.
Put aside money for your monthly expenses. Know what you need to spend on rent, gas, electric, groceries, and other necessities. Set that money aside in envelopes or a separate bank account. By budgeting this way, you’ll know which parts of your income are already devoted to other things.
Next, you can plan for your savings. Yes, savings should come before spending. Spend what you have left after saving. If you do it the other way around, you won’t be saving much. Operate in percentages instead of cash amounts. Thus, if you put 20% of your paycheck into savings, maintain that amount into the future. Then, as you make more money, the amount of your savings will increase as well.
Saving to Greater Wealth
If you get your spending under control, you should not have a problem saving more than $100 a month. Even getting to a point where you could put $500 into an investment vehicle with 6% growth year-over-year means you would have almost $500,000 after 30 years. As your positive habits spill over into the rest of your life and you develop a stronger income, you can save more and make the potential behind these returns even stronger.
The average individual makes the mistake of seeing what they are paid and calling it their income. You will know all of the money is not for you. Make sure you know how much of that money belongs to other people and how much you can plan on saving. Once you have your budget under control and are prepared for growth, you’ll enjoy planning out what you will commit towards future freedom and what you are prepared to spend on current experiences.