When we think of How to Get Rich, we probably think of business tycoons like Richard Branson owning multiple businesses or real estate veterans like Donald Trump buying, selling real estate. Yet, initial wealth creation strategies can start at a much simpler level. A very simple wealth creation fundamental is the rather unexciting yet highly powerful personal financial management skill we call ‘household budgeting’.
Household budgeting plays an important part in the process of eliminating debt, managing expenses and ultimately getting richer. Initially it can feel like an uninspiring task to undertake and ultimately manage (especially when compared to the thrilling, edge-of-your-seat excitement that entrepreneurship and other wealth creation vehicles appear to be). So, not surprisingly few people create a household budget and even fewer still stick to it. Yet it is an eye-opener for many people to learn that household budgeting is a key strategy in ultimately becoming rich. It is really worth doing. Sure, it won’t make you a millionaire overnight but you will never become rich if you don’t first master this fundamental personal finance discipline.
The Leaky Bucket Syndrome
To demonstrate how vital household budgeting can be we can use a very simple illustration: Imagine that your job is to fill a bucket of water and carry it from point A to B. The more water you carry to point B, the better. So, you fill the bucket and carry it to point B. However, your bucket is now only half full because lots of water has leaked out of numerous holes in the bottom of your bucket.
So, what do you do to rectify this? Most of us would answer with the obvious answer: “Find a bucket without any holes in it dooh!”. But in the real world, where our income is equivalent to the water and our bucket is our bank balance, we often don’t think about plugging up the holes. Instead, we try to figure out more ways to pour more “water” (i.e. income) into our “bucket”! This is fine so long as the leaky holes are plugged first.
Running your Household like a Business
The FIRST STEP in establishing any possible leaks in your bucket is to collect all of your necessary financial information. This will include all credit card statements, bank statements and receipts for purchases made, etc. Anything that documents your expenses over the last 3 to 6 months should be collected if possible. You will then need to categorize your expenses into both household and personal expenses. Beside each category accurately estimate how much you spend on each on average each month. You CANNOT do this in your head so it is a good idea to do this on an Excel spreadsheet if possible and if not; simply draw two columns on a lined sheet of paper. This way you will know at a glance how much you spend on your home, your car, your food, healthcare, entertainment and so on. At this point you are not tracking your expenses, you’re simply deriving expense categories for your budget.
The NEXT STEP is to enter your NET income (after tax) above the expenses and subtract one from the other to determine whether there is a negative or positive balance at the end of each month. It’s a good idea to add in your net income only after all your expenses have been attributed first as this prevents you from manipulating your expense to fit your income. If you end up with a negative balance do not reduce your original expense estimate to try and end up with a positive balance. We must be 100% honest with ourselves at this stage.
Must-Haves and Nice-To-Haves
The FINAL STEP in creating a household budget is to look at each expense and determine is it a “must-have” or “nice-to-have”. In as much as is humanly possible you must eliminate all or practically all those nice-to-have discretionary expenses so that you are at least breaking even each month. Ideally you should aim to have at least 10% of your income left over for saving, fast-track debt elimination (paying off high-interest loans first) and then investing in other wealth creation assets.
Once your budget is created, implement it immediately and then track your spending for a month or two. Keep your budget close at hand in your back pocket or stick it onto the bathroom mirror. Assess your spending and re-evaluate your budget if you need to. Your budget is not set in stone. Some expenses will be fixed such as your mortgage and others such as entertainment will be variable meaning you can control how much you spend.
There is so much more to write about household budgeting, but undertaking what’s outlined in this article is a great place to start. A budget is nothing more than a spending plan. Creating a household budget doesn’t mean you have to go on a personal financial diet. But if you are financially poor and want to get rich, the first thing you need to do is control your expenses so that they are less than your income. It will enable you to understand how you manage your money and if necessary, make sure you only spend what you need to spend. Then you can start saving and then investing at least 10% of your monthly income so that you can begin creating the wealth and lifestyle you truly desire