The mindset of proper budgeting isn’t about magically avoiding debt, but it’s about responsible money management and discipline. Similarly, budgeting is not a sign of defeat nor shame, but it’s a preventative measure against financial distress. The crucial step toward financial independence is a wise, humbling, and necessary experience.
Financial Sustainability
The primary goal of budgeting is to ensure that income does not exceed expenses. When income exceeds expenses, cash inflow is greater than outflow. If expenses outweigh income, that causes a deficit, which is unsustainable.
Therefore, start by writing down all sources of regular income and expenditures. Starting small gives you a clear picture of your living expenses and answers “where all the money went.” There is no shortcut besides reading old bank and credit card statements, asking friends and family, and tracking spending.
The First Draft
From the start, allocate money to taxes, donations, savings, and retirement investments. As a motivator, decide on savings goals, such as an emergency fund, travel, or a large purchase. Afterward, add essential spending, such as housing, groceries, and debt. Then, create discretionary spending categories as appropriate for your lifestyle. This could include subscriptions, restaurants, hobbies, and entertainment.
Live in Discipline
After creating and filling each category, make adjustments so that income exceeds expenses. There are many internet strategies to take-home income allocation, but the key is to stop spending from a category when the allocated money runs out. Some strategies are lowering interest rates and the 50/30/20 rule, which is allocating 50% to needs, 30% to wants, and 20% to savings.
Bear in mind that money in greater quantities does not translate to better money management skills. According to the CFP Board of Standards, almost one-third of lottery winners eventually declare bankruptcy. Therefore, paying off debt and living within one’s means can require uncomfortable sacrifice, but focus on the great reward. Sometimes, simple things like shopping lists and an envelope system may be best to prevent overspending. Remember: deep-seated financial situations tend not to self-repair.
The Next Step: Financial Planning
Having a strong grasp of your income, expenses, and goals sets the stage for long-term financial planning. For a free consultation with experienced Tulsa financial advisors, contact us today at 918-492-1361.
This overview is for informational purposes only and is not a recommendation. It should not be the sole deciding factor in making an investment. Investing is a risk and, as with all risks, a positive return is not guaranteed. Past performance does not indicate future results.