Budgeting is crucial when trying to maximize funds available for investment.
To develop a budget, you need to know your income, your expenses, and the difference between your income and expenses. If this difference is negative then you have overspent your income (not good). If this number is positive, then you have extra money to allocate to anything you want (very good). If you’re trying to build wealth, this extra money is the amount you can invest.
So the math is very simple. Assuming your income is greater than your expenses, you have money left over that you can invest. This is the building block on which wealth is created. See below.
If, however, your expenses are higher than your income, then you have overspent your income and you have actually lost money. This is not a desirable outcome. Not only have you lost money for that time period, you’ve also lost the opportunity to invest any funds for that time period. So your wealth has been negatively affected in two ways.
Assuming that your goal is to build wealth, then you want to have the most money possible to invest for your own benefit. In order to do this, you need to either increase your income, decrease your expenses, or do both.
This sounds really easy. However, in reality it can be extremely difficult. Increasing your income means finding a new job or engaging in a profitable activity that may take you away from family, friends, or other activities that you enjoy. And reducing your expenses means that you don’t get to buy as much for yourself or your family, or go on extravagant trips, or participate in expensive activities. In other words, increasing your investable funds is a sacrifice for your future.
However, in my mind, the trade-off is more than worth it. For me, one of the things that I desire most is the freedom to spend my time as I choose. In order to do that, I need to become financially free. So, I’m okay giving up certain luxuries and working on extra projects to maximize my investable funds. This should help me achieve financial freedom earlier in life.
To help get you started with your own budget, I have included a sample annual budget below. Please feel free to use this budget as a starting point in your own budgeting.
In future articles, we’ll talk about individual expense categories and how we can reduce our expenses while not drastically reducing our standard of living. Additionally, we’ll talk about ways that we can increase our income without putting too much burden on ourselves or our families.