Whether you’re struggling with money or you just got a shiny new job with an increase in income, you’re likely among the people who dream about becoming rich. So many systems online suggest that the key to getting rich can be done by using your money wisely via budgeting. However, it can be challenging to look at the rich and what they are doing with their money to consider that budgeting is what makes them wealthy.
When it comes to getting rich, many people turn to budget as a key part of their strategy. While this may seem like a practical and simple way to manage our money, it can be difficult to see how something as minor as cutting back on coffee each morning, for example, can make that big of a difference in your life. Alone, saving $5 on coffee each morning will give you a savings on average of $150 per month which is about $1,800 per year. Depending on what you feel “rich” means, you may feel like an extra $1,800/year is becoming rich. However, saving money on coffee is only part of the strategy and thus isn’t a great representative of what budgeting does regarding the question of becoming rich. There is a lot more that goes into budgeting and it’s a bit more complicated than looking at a piece of paper each month with a list of all your expenses from the previous month.
Understand the Psychology of Money
It’s often the case that we believe we don’t make enough money when in reality, we spend more than we think we do. This has less to do with our math smarts and more to do with our behavior with money. According to Rachel Cruze on the Dave Ramsey blog, creating wealth is an 80/20 deal. That is, it’s 80% about behavior and 20% about head knowledge. Your budget fits into this. Not only does it show you how you spend money, but if you look closely enough, you’ll begin to understand why.
For example, as Cruze points out, if you grew up in a household where your parents fought about the grocery budget, then you’ll probably fight with your family about over expenditures in the grocery budget. You might be frugal with money in this way but not so much in other ways. Your budget reveals the psychology behind your money choices if you allow it to and prevents the kind of overspending that prevents you from building wealth. That is, of course, if you stick with your budget.
Keep Track of Your Expenditures
When you think of a budget, do you think: I make X number of dollars each month, and I have to pay out X number of those dollars in bills and living expenses? If so, then it’s little wonder that budgeting holds little appeal to you as a wealth-building tool considering you are missing a big part of budgeting.
Instead, you should be looking at where you’re actually spending your money each month. This may involve you keeping a money journal where you track all of the money that you spend, not just the money you spend on living expenses.
Set Money Goals
Once you set up your budget, you’re now in a position to set money goals and start building wealth. When you know where your money is going toward bills, debt, entertainment, and more you are better able to reallocate your financial resources to more worthy ends.
For example, maybe you’ve decided that you want to contribute another $1200 a year to your IRA, but you’re not sure where you’ll find the extra $100. If you’ve looked at your expenditures and figured out that you spend $100 a month at coffee shops, you’re then in a position to funnel that money toward your IRA instead of your daily grind.
This might not seem like a lot, but saving $100 a month over a lifetime means that you retire a millionaire, according to the Motley Fool. Never underestimate the value of budgeting to find that extra $100 you need to become rich.
Make Your Budget Grow Your Money
One of the most critical parts of budgeting is this task: finding where your money is going each month and making sure it’s going toward wealth and not debt and frivolous expenditures. Many people create a budget, save money and then miss the final step of growing your wealth with your budget which is making sure it goes toward building wealth. Don’t leave the money you are saving in a savings account. Savings accounts typically have an interest rate that is at or even below inflation meaning that the money in your savings account is a sinking investment.
Instead, you want your money to work for you. Talking with a money management firm can help you with this step if you’re not sure where to start. They can help you consider investments such as the stock market, real estate, business ventures, or other ways of spending that money so that your money can help you become more wealthy.
The only way you’d have the money to put toward investments like these is if you stick with your budget. Your budget is an important vehicle on your journey toward becoming rich. In this post, we’ve discussed how budgeting and proper money psychology (plus a few good saving habits) can make you rich over a lifetime. If you’re feeling discouraged because you think that you can’t become rich just by keeping a budget, now you know that you can.