Why Budgeting is Important to Wealth Creation

Why do people hate budgets? I know that I used to hate the idea of budgets. I would give myself a wide $200/week budget for stuff that I wanted to buy. I think it is because people, especially us Americans, hate being told what to do. “I earned my freaking money, and gosh darnnit, I am going to enjoy it!” However, when I finally got serious about digging myself out of my consumerist hole, budgeting was a key factor. I will breakdown the 3 different sections of a good budget, but first, we have to dig into why it is so important to budget. Finally, we figure out why it is so empowering to achieve your budget goals.

Detailed budgeting is so crucial because it prevents lifestyle inflation. Lifestyle inflation is the killer of dreams. Lifestyle inflation occurs when you increase your income or cash flow and use that money to increase your basic lifestyle minimum. Usually, in the military you will hear something like “Wow, I am getting a $400 pay raise. I am going to trade in my paid-off car and get something that costs $400 a month”. Great buddy! But actually, not so great. These “minor” decisions cause major destruction of wealth. That is why I always recommend that people dive into the stock market as soon as possible. Once you see an asset growing, you will want to feed it. This is the true path to wealth; seeing your wealth accumulate. And it grows fast. Most people only have their expenses budget, and that is great, but I like to break it down further.

1) Expenses budget– These are your necessities plus your nice-to-haves. It is okay to have some nice things. You do not have to live like you are living in the woods. However, truly evaluate how much of your money is going to things that you do not need or use. I reduced my HULU bill by $60 when I canceled my HULU TV plus subscription. That money can buy me 2 shares of AT&T stock per month (which pays me 7%). This is how my mind works now. Buy assets that produce money.

2) Saving/Investing budget– NO, this does not include your 401k or IRA savings. Those are a given. You need to be putting your after-tax income into investment vehicles. These include: high yield savings, index funds, electronic traded funds, mutual funds, ROTH IRAs, dividend-paying stocks, bonds, real estate trusts, etc…Yes, these should be automatically pulled from your checking account the day after you get paid. This is your minimum savings and investing for the month. I repeat, minimum!! Your goal is to add more per month, but life happens sometimes.

3) Unaccounted For budget (Cash Flow)- These are the funds that you have leftover after each of your other budgets are executed.  These funds are just as important as the other budget. This is your “life” budget. Because life happens. Especially for us with families and kids. There is no end to trying to keep up with the little expenses that pop up from day today. The goal is to get as much of the unaccounted for budget into investments as possible. That is why I started my Cash App challenge, to invest daily into assets. At the start of the month, I usually invest $20 a day into the stock market. By the end of the month, it is usually $5 a day. Why? Because life happened somewhere throughout the month. But at least I got another $200-$300 into the stock market. This is important. 

Now that you have your three budgets, you will have calculated your Cash Flow. That is what your unaccounted for funds are, Cash Flow. This is money that is flowing throughout your household. You are now comfortable with the money coming in, savings, and the money going out. If you were making $5,000 a month it may look like this. $2,000 expenses, $1,500 saving/investing, $1,500 Cash Flow. You are doing amazing. Now it is time to start creating wealth. We attack it from 2 angles. First, we start to pay down our liabilities such as car payments, loans, credit cards, and other bad debt. This will free up more Cash Flow by reducing expenses. Let’s say we pay off a car worth $300 a month. Next, we will increase our income. We can do this by looking into our 3 income-producing sources: rental income, businesses, and investment income. In this case, we will rent out a room for $500. Let’s take a look at the before and after.

Did you see the difference? Cash Flow stayed the same, but your investments went up by over 50%. Remember, your investments will also be making you money as well. Earn more. Invest more. Earn more, etc.. It is a crazy cycle that is called compounding. And it starts with your budget. 

In the end, the budgets are what keeps you from spending money on lifestyle inflation. Trust me, I am not telling you to live like a hermit. When you want to go to a nice restaurant, integrate it with goal achievements. The more knowledge you obtain, the bigger the world will seem, and the more money-making opportunities you will see. These little celebrations are vital as progress down your path to financial independence. Ensure to keep your kids posted on your goals and progress. This way they do not have to dig themselves out of a hole like we did. Budgeting is actually fun, once you consistently achieve your goals, and witness the power of compounding. \

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article.