If you want to be rich, then you need to learn how to budget like the rich. The first step in knowing how you grow your cash flow is to understand your personal financial statement. Once you have an understanding of where you are financially, it’s crucial that you create a plan to become more financially secure and healthy. That means starting with a budget to bridge the gap between where you are and where you want to be. The problem is that most people have misconceptions about what a budget is and why it’s helpful.
In my experience, there are three main ways that people budget, and the way you budget says a lot about your financial mindset. Let’s run through these 3 levels:
Those with a poor mindset often don’t use a budget. If they do, however, they use a very simple one. Why? Because they own no assets and no passive income. They simply track their earned income and their expenses each month. Whatever’s left over, which is often nothing or less, is put into savings. For those with a poor mindset, a budget serves as a tool to make sure you’re not spending too much, but it is not a driver for financial insight or growth. Budgeting this way often only exuberates the focus on financial strain and scarcity.
Middle Class Budgeting
Those in the middle class often have more income than expenses. They might have a few investments, but they are not a daily focus. Instead, they contribute to a superannuation they barely understand and maybe own a house. The middle class use a budget as a tool to understand how much money they will have left over each month. They then reward themselves for having extra money by splurging on vacations, cars, etc. In the process, they create liabilities but don’t invest in assets; therefore the source of that money is always earned income from a salary rather than passive income from investments. Any additional income often only stays in line with funding their lifestyle.
The rich don’t look at a budget as a way of comparing their income and expenses. Rather they look at it as a way to prepare for creating more money. They ask, “How can I make more money?” rather than “I don’t have enough money”. The first expense in a rich budget is the expense of investing. That then creates passive income that covers the “fun” stuff in the budget later. In the process, the rich create more money and attain more assets. Their cash flow covers their expenses.
It all stems from your mindset towards budgets. If you can master changing your budget mindset, you can master your money. To help with this, I would like to share a simple formula for creating wealth; in particular, where and how your money should be allocated.
The 70/30 Rule
After you pay your taxes, learn to live on 70 percent of your after-tax income. Then, it’s important to look at how you allocate your remaining 30 percent. Let’s try allocating it to the following:
Of the 30 percent not spent, one-third should go to charity in some shape or form. I believe that contributing 10 percent of your after-tax income is a good amount to strive for. Start this habit early so its second nature before the big money comes your way! This helps with creating a mindset of abundance, there is enough to go around and there always be plenty more.
With the next 10 percent of your after-tax income, you’re going to create wealth. Use this money to invest, be it shares, property or business, even if only on a part-time basis.
The last 10 percent should be put in savings. Poor people spend their money and save what’s left. Rich people save their money and spend what’s left. It is important to become accustom to seeing money in your bank account and not be tempted to spend it.
So, remember that giving, investing and saving, like any form of discipline, has a subtle effect. At the end of the day, the week, the month, the results are hardly noticeable. But as time passes the results will be profound.