Successful investing and financial planning requires budgeting, and budgeting is best done with a tested and trusted budget system like the 50/30/20 rule.
The importance of budgeting as a foundational component of personal finance cannot be overemphasised. Those who want to gain control over their finances and achieve their financial goals cannot do without it.
In this article, we will highlight some of the benefits of budgeting that make it foundational to successful investing.
Budgeting, savings and investing
No one can invest if they do not save.
In other words, successful investing requires that you consistently spend less than you earn.
Budgeting is a financial activity that can best be explained as how you plan to spend your income. It is through this process that you can keep a tab on your income and your expenses such that you can ensure that the latter is less than the former.
This means spending less than you earn is a deliberate act that can only occur when you pay attention to your expenses and consciously create a plan.
Consider Mr. A who earns $1,000 every month but does not have a budget and so spends the money as he likes. At the end of a given month, he might have spent the whole $1,000 or more (thus incurring a debt). Even if he spends less than $1,000 in any given month, it is only fortuitous and he can end up spending $2,000 in the next month.
On the other hand, if Mr. A sits down to create a budget, he can plan to spend only $900 every month. In this way, he will be saving $100 every month consistently. It is this extra $100 that he will invest in the market to build wealth.
Spending control and financial goals
Everyone has financial goals. And since these goals are financial, money is the only tool to achieve them. To use any tool successfully, you must exercise control over it and direct it to the goals you want to accomplish. Money is like that too.
To use money to accomplish your financial goals, you must first get a hold of money as a tool. Said differently, instead of money controlling you, you must control it.
Budgeting is a good way to take control over money and direct it towards the achievement of your financial goals. “A budget is telling your money where to go instead of wondering where it went,” said Dave Ramsey.
With budgeting, you control where every dollar is going. You can spend your money according to your goals, values, and scale of preference instead of spending it as you feel at the moment.
It is this control that also helps you to save and invest towards the accomplishment of future goals.
Budgeting and paying yourself first
George Carlson popularised the concept of paying yourself first in his book The Richest Man in Babylon. According to him, when you receive your income, the first task is to save (and invest) a certain sum and then spend what remains.
This is a way to tax yourself at the beginning of every month for your future self instead of indulging your present self.
However, to follow this advice, you need to budget. Why? The only way you can judiciously use what remains after you have paid yourself first is to create a concrete plan for how to spend what remains. Without such a plan, you might be forced to withdraw your savings, liquidate your investments, or take on debt.
With budgeting, you can plan for the amount you want to pay yourself first and the amount that will remain after you have done so.
For example, the 50/30/20 budgeting rule, a budgeting system popularised by Elizabeth Warren, a US senator, requires that you save and invest 20% of your income and spend 50% on your needs and 30% on your wants.
If you use this system, you can confidently automate your investing, allocating at least 20% of your income, since you know you have a plan in place for the remaining 80%.
Once you have created a budget that allows you to save consistently and regularly, take control over your finances, and pay yourself first, you need to invest wisely to make the whole process worth it.
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Do you want to achieve your financial goals? Consider budgeting, saving, and investing wisely with Sarwa.