Building wealth isn’t necessarily second nature to anyone, but you have to start somewhere.
Budgets aren’t simply a means to keep track of whether your bills are paid and which accounts are due. They’re your tool for managing money in a way that builds wealth. Wealth might seem like a far-off concept, but almost everyone has to start somewhere. Unless you were born into it, the only way to have a comfortable financial profile is to build it yourself.
Here are four reasons why a budget can increase your wealth, and ways to make it happen:
Budgets Reveal Income Deficiencies, Which Lets You Fill Them
One of the first steps in creating a budget is determining exactly what your income is and recording it. For people who earn a regular, dependable paycheck, this part might be simple. For freelancers and those with more sporadic income, it’s not so easy.
One recommended method is to review your income for the past year and determine a monthly average income based on the lowest amount earned in one month. You could also take an average of lower months to find a conservative monthly estimated income. This is a cautious way to estimate, but it’s also safer when income isn’t guaranteed.
Once you see what you’ve got, you might be surprised to learn that it’s not as much as you thought. Insurance, taxes, and other deductions make your hourly wage or yearly salary a bit smaller. If your income is less than you need, there’s only a couple of things to do about it – earn more, perhaps with a part-time job or by seeking different employment, or spend less.
Keep an eye on spending, and help your money work for you.
Budgets Expose Excessive Spending, Which Lets You Stop It
Everyone spends, but building wealth depends on spending less than you earn. Simple enough, until you try to implement those changes. That’s where a budget can help you sort out your needs from your wants, which lets you make better choices. When you track your spending, including cash purchases, everything is revealed
Excessive spending is a wealth destroyer. Impulse buys at the checkout, new gadgets at every release, and even grocery items that aren’t on your shopping list take money from where you want it. And where you want it is in the position of earning more.
Think of it this way. When you spend on something you don’t need, you gain an object that’s worth less (or even worth nothing) the day after you buy it. Instead of your money earning interest or dividends for you, it’s lining someone else’s pocket.
Budgets Help You Make Investments and Track Them
Investing isn’t just for the rich. Sensible investments can put you on the same path to wealth, and a comprehensive budget helps you find money to allocate in that direction. Saving money is important, but savings accounts traditionally earn pitifully poor interest. According to Forbes, Ally Bank, which is one of the top-rated internet banking institutions, offers only 0.87%. That’s not much of a return. Your money is safe, but it’s not growing fast enough to suit anyone’s taste.
If you’re just starting out, mutual funds might be a great way to ease into investing. U.S. News and World Report Money explains that while there’s never any guarantee for a return, and past performance is only a gauge, mutual funds are something that the everyday investor might consider.
Compared to the interest earned on a savings account, mutual fund returns averaging between 3% and 14% are hard to ignore. With budgeting software, you can keep track of those investments any time you like.
Budgets Help You Set Goals and Reach Them
Budgets are goal-setting tools. Used wisely, small steps lead to big advances over the months and years to come. Some people view their budget as an unpleasant, difficult, and sometimes depressing requirement. That’s missing the point, which is empowerment.
When you know what you have, how you spend, and how well your money is performing, you can make conscious choices that improve your current situation. Start small, if you must. Set one goal. Let nothing stand in the way of reaching it, even if it takes longer than you realized.
Maybe you need to start an emergency cash fund. Or perhaps you want to pay down some debt. Whatever your goal, a budget helps you get there. And when you get there, you are on your way to building wealth.
Mint.com offers a comprehensive suite of products that put you in control of your money. Sign up for a free account today, and start building wealth to last a lifetime.