Updated: May 31, 2019
Alright, let’s just admit it. The word budgeting makes the hair on the back of your neck stand up. You break out in dry sweat. Your skin gets clammy. Your stress level goes up, and you may have a number of other symptoms. It doesn’t have to be that way.
Personally, I hate the word budgeting. It’s sooooo constricting. We had to do annual budgeting at work and everyone hated it. Even the CFO (that’s Chief Financial Officer) hated it, and he’s supposed to love it! Whether at home or at work, we have to do budgets if we want to manage our money well. I prefer to call it “Watch Your Money” and it’s Millionaire Key #5 in my book, The Millionaire Choice.
The concept of budgeting can suck the life right out of you, so here’s a trick. Stop calling it a budget. Call it a spending plan. It’s a lot more fun to figure out where to spend your money that budgeting it. And here’s another secret, if you spend your money (put your money) in the right places, you can end up creating a ton of wealth and breaking out of the paycheck to paycheck life that 75% of Americans are living. Want to know how? Read on.
Try breaking your spending plan into 4 simple groups.
Living Money Living money is the money you need to live each day, week, month and year. It’s your rent, your electricity, your water, your food, your gas, your auto, your insurance, etc. If it doesn’t get paid, something bad happens. That’s living money. You need it to live.
Your living money is pretty consistent each month. It’s doesn’t change much, and it’s very predictable. Once you have it set, you don’t have to worry about it as long as it gets paid. As long as your other spending habits don’t mess things up, life is good.
Wealth Money Wealth money is the 2nd most important category on your spending plan and you want to stack it up as much as you can. The problem with wealth money is hardly anyone sticks money in this group. It’s why 75% of people are going to keep living paycheck to paycheck. They’re not thinking about their future.
If you skip over wealth money, the future isn’t going to be too bright, but if you put aside some wealth money on your spending plan, you might just become a millionaire.
How much wealth money should you have each month? Well that depends on your age and goals. My personal goal for you would be for you to become a millionaire in your 40s or 50s, but maybe you’re already in your 40s or 50s. Don’t worry, you just have some ground to make up.
The best way to figure out how much wealth money you should put back each month and year is to create your own financial plan or what I call millionaire plan. A millionaire plan gives you a real number and a real goal. A financial advisor or planner can help you figure this out or you can use some online investment tools.
Here’s a tip, if you’re not putting at least $10,000 a year into wealth money, you need to get there quickly. If you are already putting $10,000 a year into wealth money, think about what you can do to get it to $20,000 a year. Always stretch yourself and see what it will do to your millionaire plan. In general, wealth money gets neglected in favor of play money, but if you can keep things in balance you’ll do well.
Rule of Thumb: Target 4x-10x more wealth money in your spending plan than play money. That should build you a really nice millionaire future.
Play Money Alright, we’ve all got to have some fun in life too, but some of us have too much fun. We skip over the wealth money and spend way too much money on fun. Movies, trips, toys (i.e. four wheelers, new cars, boats, eating out, fancy vacations, and more). Too much play money can ruin your financial future. However, too little play money can ruin your life. It’s a balancing act.
So how much play money should you have each money. It’s relative to your income and futuregoals. If you’re spending more in play money than wealth money, you have a problem. A real problem. For slimmer spending plans, $200-500 a month isn’t a bad number as long as you’re hitting your wealth goals. That’s $2,400 to $6,000 per year. Spend it wisely.
Now let’s use the rule of thumb mentioned earlier of putting 4x-10x more into your spending plan than you are into your play money. For example: if you’re play money is $2,400 a year, then target your wealth money at $10,000-$24,000 per year. While $10,000 is probably more realistic in this case, always keep in mind the balance. This is all related to your annual income and how much you have available. If you’re coming up short, look for new ways to make some more money.
Other Money The other money group is anything that doesn’t fit into living money, wealth money, or play money. Things like Christmas gifts, birthday gifts, Valentine’s day, slush money for unplanned spending needs, or whatever. If things get bad and your money gets tight, this is the first category you cut although I don’t recommend you cut your spouse’s birthday or anniversary celebration out. I don’t think that would end particularly well for you.
That’s it. Using this simple spending plan magic when I was 25, I knocked out $16,000 in debt in about 18 months and invested over $18,000 in stocks and mutual funds. I kept this plan in place as I kept marching towards my goal of becoming a millionaire by age forty which I’m glad to say I reached.
You want balance your spending plan to cut waste out of your spending plan, have a little fun and pump up your wealth money. By balancing these four areas, you’ll build a better financial future for yourself and your family.