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Friday, December 21, 2007

Budget Your Way to Wealth . . .

Ok, a bit of a tangent warning.

This entry does not deal specifically with investing or trading. But it does have a great deal to do with accumulating wealth, and doing it safely and slowly.

In 1996 I was working for E.D.S. as a Network Administrator. I made about $43,000 a year. Which in 1996, to a 24 year old kid who had just gotten married, was a lot of money. The sad thing was, I never had a dime to my name. Money was flying out of my pockets faster than it flew in. It's not that I didn't want more money. It's not that I had a poor income. I didn't. But I just never seemed to have any extra cash. A few days before my next paycheck arrived, I was always dead broke.

I worked with my brother at the time, and he obviously noticed this. Lunch time would roll around, and I didn't go with them to many of the nicer restaurants that were around, as I didn't have the money for it. I would just end up at McDonalds every day. I won't even go near what that was doing to my health.

Well, one day we were talking about finances, being married, bills and that sort of thing, and asked me about my budget. I told him I had written one down before I got married a few months before, but that was about it. He then asked if I used Excel. "Not really", I replied.

Then he gave me a bit of a gem. More like a piece of gold. I have used it ever since. It was an Excel spreadsheet that I have made available for anyone to download here. You will need Microsoft Excel in order to use it. If you don't have Excel, I will display a picture of what it looks like here on the blog. He swore that no matter how much, or how little money I made, it would assist me to become better organized so as to accumulate savings.

He was right.

I've configured the template, for an annual salary of only about $24,000.00 a year. There are three tabs for three different months. You can add more months however by simply adding another worksheet. What you put in the expense columns will figure automatic totals to the bottom of the spreadsheet, and to the right, as well as link into the next month.

Prioritize and Pay Yourself First
You'll notice that the first thing it does is split up your expenses each month into two categories. What you consider 'priorities'. Notice that it does not put your bills in the first box. The first priority is paying yourself. That is key. You must, must, must pay yourself first. You pay yourself, by saving a certain percentage of your money, and sticking some of it in savings accounts, as well as investment accounts. I've already gone ahead and configured the template for the $500.00 Challenge Accounts, Savings Accounts (I enjoy ING Direct) , as well as a separate Family Investment Account. This is how you pay yourself first, and it must be your first priority.

(Click to Enlarge)

The Budget template is something I configured, but you can change the expenses; as it is only a template. For example, I'm a very religious person, so I like to contribute a fixed amount towards my religious organization. I consider charitable giving a priority to accumulating wealth. But you may be different. You can change both the amounts, and what is in the "expense" fields. You will also notice that I have two different Savings Accounts. I find it helpful to have a "General Savings" and a savings that I use to save up for specific purchases. I generally will spend only 10% out of that account on any one purchase. What you should not change however, is that savings and investment accounts are to be paid first.

By the way, you will note that I have set aside 20% of the income towards savings. Experts note that by doing this, you can very easily end up in the "Super Rich" category.

The second category deals with your fixed expenses. Rent. Bills. Credit Cards, and your own entertainment. The problem that many people make, is that they make this their first priority. It shouldn't be. Entertainment should come after saving for your own future. We like to enjoy ourselves, so what can typically happen is we spend too much money on pleasure, and then have nothing left and arrive at the end of the month broke.

Discipline
Nothing will screw up a good budget more, than a lack of discipline. How often do people swear that next month will be different. Only to find themselves in the exact same position in one month. Broke. You must be disciplined. It is the lack of self-discipline that causes most lottery winners to go broke soon after winning millions. You can go into debt whether you have a billion dollars, or only a few hundred. Just ask the government. It's all in your discipline.

There are ways to break yourself of bad habits. An ATM or Debit card can give you easy access to your money. This can be a great thing. But if you have developed a problem with impulse buying, this can also be a bad thing. You can spend money too easily that you should not be spending. Instead, use an online savings account like ING Direct, without having access to such a debit card. Or open another savings account without an ATM or Debit card. It's a bit of a pain to have to go inside the bank to make your deposit. But this can help you break yourself of any bad habits you may have developed with impulse shopping.

The greatest thing a person has to realize when it comes to accumulating wealth? Is that it takes time. We tend not to think of where we will be in the year 2012. But nothing can stop time. It's going to pass us by. The question is, will you take advantage of it? Or will you arrive in the year 2012 with nothing to show for the previous 4 years?

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