When it comes to building wealth, anyone can become wealthy because wealth is always accumulated slowly over time. Building wealth is simply a matter of following good financial disciplines, habits and practices day in and day out for years. While it is true that sometimes people experience large, sudden windfalls, if they don’t have good financial disciplines in place to take advantage of that windfall, they will lose it just as quickly as they got it. One of the most basic financial disciplines is setting and living within a budget. Here are 4 steps to establishing a budget based on the experience of Hornet Partners.
1. Track your spending
One of the very first things you need to do before you create a budget is to get an accurate picture of exactly where every dime of your money is going. You probably have a few large bills that eat up a significant portion of your income each month, such as a mortgage, rent, or car payments; but then you can literally have hundreds of small bills that add up to a staggering amount of money. If you add up all of the small amounts you are paying for everything from Netflix to Birchbox to Apple Music to your health club membership, you may discover you are spending hundreds of dollars each month on services you may not even use. Similarly, it is very easy to spend $6 a day on a coffee, yet if you add that up over the course of a month, you are spending nearly $200 a month just on coffee.
2. Set financial goals
The chances are high that there are things you want to do that you don’t currently feel you have the money to do. Chances are also good that you do have the money, you are just spending it on other things. Setting a budget is all about priorities. In other words, it’s about spending less on things that mean less to you so you can spend more on things you want more. For instance, you may want to travel but don’t feel you have the money. Once you start tracking your spending, however, you may realize you are spending over $200 a month on coffee and $800 a month just on eating out. If you simply made your own coffee every day, you might cut your coffee expenditures down to $50 a month. If you start taking your lunch to work and eating at home more often, you might cut your food expenditures by half. Those two cuts alone would free up $550 a month to save towards traveling.
3. Set a budget
Setting a budget is a much larger chore than just deciding how much money you are going to spend on certain things each month. The truth is, whatever money you have, you are already spending in some way. If you want to save any money or have any money for things you don’t already have, you are going to have to make cuts somewhere so you can reallocate that money somewhere else. You can’t generally make budget cuts, however, without also making lifestyle changes. This is why the first step to making a budget is not making a budget, it’s examining your spending and then deciding what your financial goals are. Budgeting is about deciding what is most important and what is least important, then cutting your spending on the things that are least important so you have more to spend on the things that are more important.
4. Pay off debt
These days, savings may generate a one percent return interest rate if you’re lucky, but credit cards and other types of debt will generally cost you between 13 percent and 29 percent interest. There are very few ways to earn that much in interest each month, which means that until you pay down or pay off your debt, you will always be paying more in interest than you are earning. While you should certainly have enough in savings to carry you through a few months of crisis, it won’t do you a whole lot of good to start saving more than that until you pay off debt that is accumulating interest. Thankfully, there are a few ways of doing this. Debt consolidation through Hornet Partners is a great way to pay down debt and possibly even reduce the total amount that you owe.
Establishing a budget isn’t simply about reallocating your finances, although that is a good place to start.
Eventually, however, the goal of setting and living within a budget is to free
up much-needed capital to give you the ability to do what you really want to
do.