Budgeting, is not the most exciting part of finance, yet nevertheless a crucial skillset necessary to achieve financial freedom. In general, budgeting and developing the habit thereof is relatively easy. Simply a matter of tracking , recording and analysing expenses and income then of making the necessary adjustments.
Although deceptively simply it is a skillset many that struggle financially neglect. Perhaps it is because it is so simple, or maybe it is due to a shortage of discipline, however, the fact remains that many people cheat themselves when it comes to their budget, that, or overlook it completely. Yes, budgeting and frugality, in general, is not sexy, yet all financially successful individuals have one thing in common. They spend less than they earn.
“Yes, budgeting and frugality in general, is not at all sexy, yet all finacially successful individuals have this in common. They spend less than they earn”
For example, an individual can receive a six-figure income yet still be poor at the end of their day if their expensive and personal habits exceed said income . Conversely, someone can earn a modest 30-40 thousand yet ultimately be more financially stable as the aforementioned spender. Thus allowing more funds to reinvest in their education, business and future happiness. Budgeting and a careful consideration of which expenses are actually necessities and which are luxuries is a crucial part of this.
Understand; bigger overheads are quite easy to recall and record. They are large and regular, therefore they stand out in our recollection. Most people would recall dropping a few hundred or thousand dollars on that utility bill, rent or equipment upgrade. A few bucks here and there, not so much.
Yet almost everyone spends a few small, seemingly insignificant dollars here almost daily that represent considerable holes in their budget. The why of it is due to the power of compounding.
To use a common example, a daily Cappucino lets say costs 3.5. Multiply that by 30 and you have spent 105 a month just on your coffee addiction. Ok, 105 dollars is not exactly life changing. But remember this is a personal expense, paid with dollars from your profit margin, after all your overheads and taxes. Exactly how much turnover do you need flowing through your business to net a 100 dollar profit margin?
Using a modest 10% as an example: that 100 dollars equates to a little over a grand of turnover per month, that you need to generate just to pay for your daily brew. Let us expand that to 12 months a year, which results in over 12 thousand dollars of turnover per year just for that daily cappuccino. Surely an extra 12 thousand dollars plus of turnover adds a lot of extra pressure on your business cash flow. Especially if your business is in the early start-up stage or is going through periods of required bootstrapping.
Remember this is just one small example. You probably have many little daily expenses that go unnoticed. All these factors added together, compounding over time can, in fact, represent a significant portion of your monthly budget. That’s the magic of compounding. It’s either working for you wondrously or conversely just as powerfully against you.
“Thats the magic of compounding. Its either working for you wonderously or conversely just as powerfully against you.”
The good news is, these small daily expenses are really just habits. And habits when you know how are relatively easy to change. Studies show 2-3 weeks of concentrated conscious effort results in the formation of new habits.
So if you are adhering diligently to your monthly budget yet still at the end of the day find yourself short of money maybe just maybe, it is those small unremarkable, inconspicuous purchases, not the big expenses that make all the difference.
And as for me , yes I do enjoy the occasional Cappuccino, but it almost always linked to further developing my businesses, as a large number of my meetings with clients, suppliers, partners etc and my networking takes place in cafes and restaurants, due partly to the nature of my industry but also because I prefer a more informal and relaxed atmosphere in which to conduct my business.
What are your budgeting tips? please comment below,