This is Part 1 of the Become a Millionaire in 2020 series being run both on this blog and on my YouTube channel. Any questions, thoughts, ideas or criticisms, please get in touch through this site or on the comments of the YouTube video.
When thinking about and learning about personal finance, regardless of goals or objects, there is one topic that comes up time and time again. You need a budget to manage your money properly.
A budget is simply a plan for your money and where it will go so you can help yourself make the best decisions for your hard-earned cash. It’s a blueprint for limiting expenditure on particular areas so you can maximise the usefulness of your money.
Wow! Sounds boring.
Well, for the most part, for most people, it actually is really boring. It’s one of those things you really need to do to master your finances and take control of your money.
If I asked you how much you spend on fuel each month… could you tell me? How about lunches while you are at work? Clothes? Gifts? Restaurants? Electric? Water? Your kids? Pets?
If the answer is no, then you could be overspending in these areas without knowing it. By saying overspending, I’m not trying to tell you how to spend your money – that is everyone’s personal choice, but rather I mean you could be spending more than you realise or more than you might want to and that could be keeping you broke!
I’m writing this article in the context of talking about why we need a budget to become a millionaire in 2020 and beyond, so there is going to be some opinionated stuff from here on out.
Time to get serious and create opportunities
If you are serious about becoming a millionaire, then the average man/woman on the street is going to have to make some sacrifices along the way. But perhaps “sacrifice” isn’t the right word or mindset for this.
What I mean is that you are going to have to create opportunities for yourself.
One of the overriding themes of this series is to make the most of every opportunity that comes your way. Your budget represents this first opportunity to impact your ambition to become a millionaire in a very positive way. If you have never created a budget before, then you could be in for a shock.
It will take a little time and effort to put an effective budget together, but the information and you will receive about your spending habits and where your money is going, will be eye-popping and will really help set you on a good path.
Why are you making me do this???
Well, you must first understand why you want to make a budget. In the context of this article, it’s because you want to become a millionaire! Various studies indicate only around one third of households live by a strict budget and those households are twice as likely to report zero financial worries vs those households that spend all their income every month. A budget will help you direct your money where it needs to go, not where you feel like sending it, and in this case, we will be converting all those unnecessary spends, into useful investments, working hard to take you to millionaire status.
For the purposes of becoming a millionaire, our budget goals are going to be:
- Getting out of expensive debt (credit/store cards)
- Finding a way to save more money
- Reducing overspending on frivelous items
- Making sure your spending reflects you as a person. You work hard for your money, so make sure that you respect yourself as you spend it
- Avoiding spending money you don’t have
- Staying on track toward long-term financial goals
I talk a lot on my channel about emotional investing being a bit of a bad thing, but when you write out your goals, there has been some research that would suggest the act of spending energy and your time in terms of writing out your objectives, make you more invested in those goals emotionally and therefore more likely to see them through.
Scrutinize your spending over the last three months
It’s time to get into the details of the last three months. By understanding where you are currently spending your money, you can see where you can better redirect your cash.
It’s time to get out those statements from all the cards you use and write down (or use a spreadsheet) what all your transactions are being used on. Every bill you paid, every sandwich you had for lunch, every morning coffee, every night out. Transport, heating, phone, fuel…. everything. You get the idea.
After you have done this honestly you will have a pretty good idea where you can start to save money, and in fact where you need to think about redirecting more of your cash.
Having your spending in front of you in black and white is likely to bring your spending into perspective and might even bring in a few home truths,
Perhaps you are paying credit card interest. In that case you might want to think about discarding those fancy pre-pack sandwiches and make your own.
Going forward then, it’s important to keep tracking how you are spending your money. It doesn’t have to be fancy. Even a piece of paper will do. Perhaps one of these spreadsheets available free of charge.
You might even want to try some money management apps such as Mint or Emma. Stay on top of it and always be looking to see where you can make some adjustments to start freeing up some money for investments! Even small changes are going to rack up over time, so get started!
So I can’t spend money on stuff I want?
No, no, a thousand times no.
You have to live your life, and have fun doing it too, hopefully.
The point of doing a budget is to cater for what is important to you – to prioritse spending so that you aren’t wasting money on things that don’t bring you any joy. By streamlining our spending, to get the maximum value for your pretty pennies, you are going to free up more cash for saving and investments which is ultimately going to drive you forward in this race to be a millionaire. However in saying that, given our overall goal is to become a millionaire, then you will likely need to take a fairly agressive approach to curbing your spending.
Getting a budget established is going to allow you to scrutinize your spending and make the appropriate adjustments in your spending habits. Monitoring your spending on an on-going basis is going to allow you an opportunity to develop good habits and get rid of the bad ones as you go on this journey to a million!
As a money saver and investor myself, it’s a lot of fun to trying to beat last month’s savings and investing total. By maximising the amount of money we can save for investing each month, and getting that money to work we are going to be able to take advantage of time, and compounding… but that’s another article altogether.