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Disclaimer: I am not a certified financial professional.  All articles and posts are opinions expressed by me, a contributor to the Common Cents Finance platform.  The information provided is not a research report or financial advice.  It should not be used as the basis to buy or sell a security, nor is it an offer to buy or sell a security.  This article generates revenue through affiliate commission at no cost to you.

According to a FINRA study, 19% of households in the United States spend more than they earn, while only 36% break even.  This means that over 50% of American households either spend as much or more than their income.  This is a pretty crazy statistic, as it indicates that most Americans do not budget their finances accordingly.  With such reckless spending habits, many are not able to take advantage of financial opportunities, such as creating an emergency fund and investing.  In order to prevent overspending, more people need to begin budgeting.

“It’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

Robert Kiyosaki, Author of Rich Dad, Poor Dad

No matter how much money you make, budgeting is the only way to ensure your personal finances are in order.  Otherwise, you could easily be overspending in areas of unimportance.  For example, you could have an income of $1 million, but, if you spend $1.2 million annually, then you would be broke!  As Robert Kiyosaki, the author of Rich Dad, Poor Dad, says: “it’s not how much money you make, but how much money you keep, how hard it works for you, and how many generations you keep it for.”

Proper budgeting would allow you to recognize poor spending habits and prevent them from occurring in the future.  When you choose to spend your money on a purchase, you are indirectly choosing not to use that money for something else.  This is the opportunity cost of every purchase.  With this mindset, every purchase you make is a sacrifice of opportunities you could have used with your money instead, such as saving or investing.

Each one of these opportunities could have significant benefits on your financial well-being.  But, if you do not limit your spending and continue to consume recklessly, then you will not have the money necessary to take advantage of these opportunities.

Where to Start Budgeting

Budgeting can be a very simple process.  You just need to know where to start.  The first aspect of budgeting is figuring how much of your income you want to be allocated to different categories.  

  • What percent of your income do you want to invest?  
  • What percent do you want for expenses?  
  • What percent do you want for paying off outstanding debt?
  • What percent do you want for discretionary purchases?

These percentages vary based on your lifestyle.  For example, if you are completely independent and not reliant on anyone else financially, then you would have to allocate a high percentage of your income towards expenses.  Also, if you are a frugal person and choose not to spend your money often, you can allocate a small percentage towards discretionary purchases.  I personally would recommend everyone to invest at least 10% of their income, regardless of whether it’s in a retirement account or a normal brokerage account. 

Additionally, I think it would be wise to always pay yourself first.  Whenever you receive a paycheck, consider investing a portion of your money before doing anything else with it.  Doing this would hold you accountable to invest on a regular basis, which would allow you to build wealth over the long term.

With at least 10% allocated towards investing, you can choose how you want to allocate the rest of your income.  That is the greatest part of budgeting.  It does not necessarily mean that you are completely changing how you live your life.  Instead, it is allowing you to take charge of your finances, eliminate wasteful spending, and take advantage of beneficial financial opportunities!

How to Track Your Spending

There are a number of ways for you to effectively budget your finances.  Depending on how you spend, you can choose to adopt any budgeting strategy you like!

Create Your Own Spreadsheet

Firstly, you could create your own budget either using a pen and paper or on a spreadsheet like Microsoft Excel.  This would be very effective for analyzing your spending from a previous month.  Having prior purchases outlined on paper or on a spreadsheet, you would be able to identify areas of overspending.  You might realize that you spend $200 more on takeout than you are comfortable with.  By identifying something like this, you know where to make adjustments in your spending habits to make the most of your money.

Try Budgeting Apps

Another way you can budget is by utilizing a number of mobile budgeting apps.  There are standalone apps, such as Mint by Intuit, that automatically track your spending for you.  These apps aggregate the data and demonstrate which categories you spend the most.  This would allow you to eliminate unnecessary spending also.  In addition to standalone apps, a number of mobile banking apps have budgeting features as well.  For example, the Bank of America app has a feature that tracks your spending by category, which allows you to review your spending habits.  Either approach would allow you to have a better understanding of how you spend your money and in which ways you can save more of it!

Make Your Own System

Personally, I do not formally track my spending. In my opinion, tracking all spending down to the penny is not always practical, considering that it can be time-consuming. Instead, I created a system where I mentally budget my income.

As soon as I receive a paycheck, I immediately invest a percentage of it. This percentage was decided by me ahead of time based on my current financial situation. I personally prioritize investing and retirement planning greatly. So, by paying myself first, I ensure that I am on track with my financial goals.

After paying myself, I pay off any debts that I have. For example, as soon as I invest, I use some of my remaining funds to pay off my credit card bill in full. This ensures that I never miss payments and that I am always debt-free.

Lastly, after I paid myself and my debts, I use the remaining parts of my paycheck on discretionary purchases, like going out to eat or on clothes. Because I prioritized investing and paying debt with my paycheck, I do not care to track how I spend the remaining amount. I took the preemptive measure to take care of myself financially. By doing this, I would never overspend on unnecessary purchases. (It is also worth noting that I do have an emergency fund already. If you do not have one, I would also consider contributing to an emergency fund before making discretionary purchases).

Ultimately, this is a system that works for me, and it might not work for everyone. However, this is just to show you that you can be on top of your finances without actually having a formal budget. Just be cognizant of your spending and be financially responsible!

The Benefits of Budgeting

By properly outlining where your money goes on a monthly basis, you have complete control of your money. This allows you to maximize the utility of your income. “Anthony, what do you mean by ‘maximize the utility of your income?'”

Budgeting opens your eyes to how much of your money you are throwing away on a monthly basis. Do you really need to have FOUR streaming service subscriptions? Do you really need to go out to eat THREE times per week, the weekly average for an American? I would argue no. And, although you might see them as very minor expenses, small costs add up over time.

A subscription that’s $5/month equates to $300 over the course of five years just for a single service. This would be in addition to other subscription services or other expenses. A JD Power study found that the average American had four streaming services in December 2020, which would cost just under $50/month. So, look to “cut fat” in your typical spending. It would allow you to make the absolute MOST of your money.

Just Don’t Go Overboard

In no way am I saying eliminate all discretionary spending. People SHOULD spend their hard-earned money on things they enjoy. There’s nothing wrong with going out to eat or having a subscription to a streaming service. Irish poet Oscar Wilde once said “everything in moderation, including moderation.” Yes, you should try to spend in moderation, but you also need to enjoy life a little.

However, there is a problem with excessive spending. Going out to eat once a week is different than going out to eat three times a week. Having one streaming service subscription is different than having three or four subscriptions. Use a budget to identify where you are overspending, and try to cut back on some areas

By eliminating unnecessary purchases and expenses, you would consequently have more money available for other things. This could open the door for you to start investing, planning for retirement, creating an emergency fund, or paying off debt! A proper budget can open many doors for you and allow you to be one step closer to financial independence!

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Post Author: Anthony Crincoli

Anthony is the Founder and Lead Content Creator for Common Cents Finance. Away from the platform, Anthony is a CPA Candidate and an auditor for a Big Four public accounting firm. He has a passion for personal finance and looks to promote financial literacy whenever and however he can.

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