Friday, February 17, 2023


Chapter 6 | Okay—You’re Ready to Create a Budget

No matter what your financial situation, you have financial goals, even though you may not think of them that way.

When you create a budget, you keep all of your financial goals as the central focus, figuring out how to cut your current expenses — or increase your current income — to get you on track to meet those goals.

How you decide to cut back or add income will be as unique as your goals are.

Every decision you make will be specific to your financial goals and your current financial situation, which no one else has to know about or agree with.

Keep in mind, though, that you may not be able to meet every one of your goals if you also want to maintain your current level of spending.

Budgeting is often the art of compromise: You have to decide what to give up in order to get what you want.

To stay above water financially, you have to spend less than you make. This simple point is the most important principle for constructing and living within a budget. You simply cannot meet financial goals if you don’t live within your means.

Remember: A product is only a good deal if you’ve planned for it and can afford it within the context of your other financial goals. Nothing — not low interest rates, a sale on shoes, the house of your dreams — is ever a good deal if it requires you to spend more than you make.

Spend Money Only on Budgeted Items

After you set up a budget, you can spend money only on the items that your budget says you can spend money on, while budgets can be constricting, the only force controlling your spending is you — or, to be more exact, your financial goals.

Save for Unexpected Expenses

People often get into financial trouble because they don’t expect the unexpected. By intentionally saving for unexpected expenses, you can break this cycle.

Ideally, you should keep six months’ income in the bank.

If there are two wage earners in your family, keep six months of each person’s income in savings. Yes, this is a lot of money, but this much money creates choices in your life. You’re never going to feel stuck again.

The trick to having money available for unexpected expenses is twofold:

First, you never dip into your savings unless you’re faced with a truly unique situation. If you have time to plan for an unexpected event, save in advance by changing your lifestyle to free up more money for savings, but don’t dip into your savings unless you absolutely have to.

(Make sure that you have an allotment for savings in your budget, even if it’s just $10 per paycheck for now, and work toward eventually saving up to six months’ salary for every wage earner in your household.)

The second part of the trick to keeping savings on hand for unexpected events is always to replace it after you use it. 

If you have six months’ salary in the bank and you use one month’s salary to make up the difference between your disability pay and your normal pay, when you get back to work full time, immediately begin replacing that one month’s salary.

These two concepts — leaving money in savings for unexpected expenses and replacing any money that you borrow from your savings when unexpected situations arise — are not common in our society.

Having this security gives you the power to choose, and that’s the greatest power you’ll ever have 

Revisiting Your Goals and Priorities

You can find a way to make more money by getting a second job, doing freelance work, starting your own part-time business, working overtime, or finding a new job that pays more money.

Keep in mind that whenever you work more hours, you give up something very precious — time.

If you haven’t yet written down your goals, you must start there. You’ll need to know your goals before you can establish a budget.

To be useful, your goals must be in financial terms, with actual dollar amounts attached, and must have set deadlines attached to them. Otherwise, what you call goals are really only pipe dreams.

What Expenses Are You Willing to Cut?

Another way to balance your budget is to look more closely at your expenses.

Deciding Whether You Can Increase Your Income

A final way to balance your budget is to find ways to increase your income.

Don’t count on “possible” income when budgeting.

Budgeting is about compromise. You can’t get something unless you give something.

Never forget that you are going to live with this budget every hour of every day until the day you meet your financial goals. If you don’t think you can do that, revise your budget again!

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