This is a guest post by Ashley at Money Talks
The road to wealth may not be a smooth ride, but the fact remains you are either moving towards wealth, or you are moving towards poverty. Everyone moves along this road in one direction or the other. The path to wealth isn’t overly difficult or complicated, but it does take consistency.
Every single thing that’s ever been said or written about personal finance can be summed up in 5 words. “Spend less than you earn.” All of personal finance either deals with the spending, the earning, or what to do with the leftovers. It’s the leftovers that make you rich.
If you earn $5,000 per month and spend $6,000 per month then you are moving toward poverty at $1,000 per month, which is a pretty good clip. The debt will pile up quickly. How long until you can’t make the minimum payments anymore? On the other hand, if you earn $5,000 and spend $4,500 then you are moving towards wealth at $500 per month. You will have $6,000 per year to use to grow wealth. If you can drop your spending to $4,000 or increase your earnings to $5,500 then you can move towards wealth twice as fast.
Your budget is your GPS device. If used properly it will tell you if you are moving towards poverty or wealth and at what speed. It covers the three areas of finance, your earnings, your spending, and your leftovers.
Creating Your Budget
Your budget should include an area where you track your earnings. From your earnings you can divvy up how you would like to spend your money. Rent, groceries, insurance payments, and so on. Include a category for everything you can think of. Getting your hair done, car maintenance, holidays, vacations. Once you have your estimating done it’s time to track your spending. I know it’s the most tedious part of finance but it’s also one of the most critical. We all think we are doing just fine. You might find out things aren’t as rosy as you imagined. Or you might find out things aren’t as bad as you thought. You don’t know until you find out where you are actually spending those dollars.
At the end of the month you will know if you are moving towards poverty or wealth. Do you have leftovers? If not, then you are moving towards poverty. If you broke even that’s not really considered standing still. Unfortunately on the road to wealth there is a pretty strong headwind. If you sit with your car in neutral for too long the wind will slowly push you towards poverty. Things like inflation and emergencies will erode your standard of living over time. If you relied on debt to make it through the month then you are really moving towards poverty.
If you had leftovers, then great job! You are moving towards wealth. Decide how to best use those leftovers. Once you have a small base of savings built up you should work to tackle any debt. If your consumer debt is paid off you can start saving for the future.
Tweaking Your Budget
Whether you are moving towards wealth or poverty, it’s time to tweak the budget. If you are moving towards poverty aim to slow your speed. If you are borrowing $1,000 per month then aim to borrow $500, then $250, then break even. It might take time to plug the holes. I’d rather see you just slow down on your race to poverty than to feel it’s too big a job to turn around and therefore give up. Once you are at the break even spot, spending exactly what you make, then try to start saving some money. Be on the lookout for ways to cut spending in your budget while at the same time looking for ways in life to increase earnings.
Once you have some leftovers you can always work to find more, but keep your money in balance. You always want to have some fun money too. There is still room for fun on the road to wealth!
Are you moving towards wealth or poverty? Do you use a budget to keep track of your money?
Ashley writes at Money Talks. Her mission in life is to help people get control of their money. If you like this article you should subscribe to her feed, follow her twitter account @MoneyTalksCoach or like her Facebook Page.
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