Why You Need To Create A Budget
Budgeting can be a dirty word. To some people, it feels like sacrificing fun nights out for colour-coded spreadsheets. Or passing judgment on what we’ve previously spent money on leading to feelings of guilt. Or giving up holidays to put money in a savings account that never seems to get big enough to make an impact on your life. I’m here to try and dispel some of the myths about budgeting and explain how we made it an enjoyable, positive experience. This allowed us to live our dream of travelling the world, without money worries. I know, a big goal. And that’s exactly what we’re here to talk about. But first, what exactly is budgeting?
Why Should I Create a Budget?
There are plenty of reasons to start living within a budget. First, it can help you pay off debt. Debt can be helpful to help us get ahead if we’re using it for education or to buy a home. Other times, it’s a convenient tool to help us bridge the gap between payday and our desires. You might want to grab a new pair of shoes this week while they’re on sale, but your wages aren’t due until next week so you pop them on the credit card. Again, useful. But it can get us into trouble if we’re constantly living beyond our means or the debts start to pile up. A car repayment, credit card bills, a hire-purchase TV alongside the now super common buy-now-pay-later schemes. All of sudden, your outgoings can end up being larger than your pay cheque.
You're also often paying more for each of those items than if you paid cash. A quick look at a mortgage calculator shows how much money you’ll pay in interest over the lifetime of the loan. It’s scary. And that’s a lower interest rate compared to other sources of debt. So paying it off can help you pay less for things overall. Winning.
Secondly, investing is the best way to make money while you sleep. Compound interest is your friend and if you start investing now, you’ll be able to live more comfortably when you’re older. Creating a budget (and sticking to it) will mean that you’ll live within your means and begin to put money into savings. We’ve got more information on investing over here.
So now we know why you want to create a budget, how do you get started?
The First Step
You’re probably excited to know the first step to creating a great budget doesn’t involve a spreadsheet. It’s actually understanding your personal motivation for budgeting in the first place. I’ve listed out a few things above, like retirement or paying less in interest. But those things might not excite you.
You need to find your own motivation as we did, that will make a massive difference. My recommendation is to picture yourself in ten years. Visualization is a powerful tool to keep you focused on your goals. Ten years is far enough in the future that you won’t be constrained by things in your current situation. Ten years is a long enough time frame that you can make big changes to your education, job role, location or the people in your life.
So where are you in ten years? Think about where you are living, who you are with, if you have children, if are you working and if so, what are you doing? Think about how you want to feel as much as the practical stuff. Do you want to feel relaxed and chilled out or busy and hustling at work? Get as much detail into this as possible, but also don’t worry if some things aren’t clear. You might know you want to be in a high-powered career, but you don’t know exactly what job. Or that you want kids, but you’re not sure how many (or who with!). You can clarify these details as you move closer to your dream life.
How To Set Goals
Now that you have something to build toward, you can start setting goals backwards from there. If you know you want to be an executive in a big company, what smaller goals can you set now that will help you get there? If you want to retire young, what financial decisions can you make today that will help you get there?
Think of your goals as stepping stones. You can have multiple goals that lead up to parts of your vision. Step by step, you’ll create your dream life.
Applying Your Goals
Now that you have a goal to start working towards, you can start with your budgeting. Take stock of your expenses. You can either do this by tracking it for a set period of time or have a look over bank statements and see where everything is going. I’d recommend creating buckets, such as rent, play money, utilities, food etc. You can be as broad or narrow in your categories as you like.
Then look at your expenses each month and compare them to your goals. For example, are those Sunday brunches moving you towards your goals? If you had said you wanted to build strong relationships with your friends and family, then yeah, they probably do. But if your goal is to have financial freedom in the future, then perhaps they don’t and you might want to reduce how much money you are spending on them.
An Example
To give you a practical example, when I started to think about where I wanted to be in ten years, I knew I wanted to be living overseas. I also wanted to be working, but I didn’t want my job to be my primary focus so most likely I wanted to be freelance. This means that I needed to make sure I had enough money in the bank so that in the downtimes I’m not completely broke and stressed about finding that next client.
It also meant I needed enough money to head overseas. I set a dollar figure amount that I wanted to achieve before I left. I also needed to make sure I had an emergency fund saved up for the quiet months or surprise expenses like flying home if I needed to. From a work perspective, I needed to make some decisions that would help set me up to be a freelancer rather than an employee. You can see all of these as stepping stones towards the bigger goal.
Then I looked at what I was spending my money on. This helped me prioritise my savings, as I knew each dollar added to my savings account was one step closer to my dream life. Doing this makes budgeting feel less like sacrificing and more like taking control of my life.
Get Started Here
Excited to get started? Here are the three simple steps you can take today to get you excited about budgeting.
Dream Big. Think about where you want to be in ten years.
Set Some Goals. What steps do you need to take to get to your dream life?
Follow the Money. Look at where your money is going and if it is moving you towards those goals.
Next Step
Budgeting to me is all about decisions. You can spend your money on whatever you want, but most people have a limited amount of it. Looking to see what you are currently spending money on and whether it is going to fulfil you, in the long run, is the first step in feeling motivated to create a budget. Then we can get on the spreadsheets.
If you’re ready to start moving closer to your dream life, check out the 50/30/20 Budget to help you get started. It’s budgeting but super simple.
