How To Handle Real Life Expenses
When Kim and I created the board game CASHFLOW, we did so to help people escape the rat race. The rat race is the cycle of poor financial habits.
It’s no secret that the average American isn’t good with money. Statista recently reported that “nearly 70% of Americans have less than $1,000 stashed away.” And “almost half of Americans have nothing saved.”
The bad habits of so many were compounded by the effects of the coronavirus pandemic when millions found themselves out of work.
A U.S. Bank Study found that only 41% of Americans budget their money, and the writer thinks it’s the primary reason why money problems are so bad in America.
I agree that having a budget is an important first step to gaining ground in your personal finances.
But having a budget alone won’t fix the underlying problems that most Americans have when it comes to money.
First and foremost, there is a great need for financial intelligence. The problem with most budgets is that they cater to the old rules of money that simply don’t work anymore, like save money, get out of debt, and live below your means.
Ultimately, budgeting, as it’s usually taught, is a vehicle for cutting expenses, not making money. Changing your mindset can turn a budget into a vehicle for growing your assets, not saving your expenses.
The Pay Yourself First Philosophy
When you begin paying yourself first, it will feel totally backward because you’ve been doing it wrong for decades. But trust me, it’s the only way to go. Kim and I have had many bookkeepers and accountants who have balked at our approach because they too have grown accustomed to paying themselves last.
Each month, whether it made sense or not, we put aside a set sum of money into our asset column. We treated it just like an expense. In fact, we treated it as our most important expense. Even during times when my cash flow was less than my bills, I still paid myself first. And you can too. How?
First, don’t get into large debt positions that you have to pay for. Keep your expenses low. Build up assets first. Then buy a big house or a nice car later.
Second, when you come up short, go ahead and let the pressure build—don’t dip into your savings or investments as a bailout.
You see, poor people have poor habits. And one of those poor habits is dipping into savings to pay bills. Use the pressure to inspire your financial genius to come up with new ways of making more money, and then pay your bills with that. Bonus: You will have increased your ability to make more money and boosted your financial intelligence.
So let’s say you’re taking home about $4,000 a month. If you first pay yourself $500, then you have $3,500 left for living expenses. After one year’s time, you’ll have saved $6,000. You can even set this up automatically with your bank, to remove the temptation of spending the money.
Once you’ve decided to “pay yourself first” it might then be wise to set up a budget.
A Budget is a Plan
Ultimately, your budget is a plan. As such, it can be a good plan or a bad plan.
A bad plan is one that requires you to cut expenses and save money. You don’t enjoy the things you’re used to enjoying and you make little to no money on the money you save. Ultimately, it won’t get you where you need to be financially.
A good plan, however, is one that spurs action for the better. And a good budget is one that will inspire you to make more money so you can do what you love and grow your money exponentially.
With that in mind, here are three tips on how your budget is a helpful tool to grow your cash flow the right way, through investments.
- A budget shows you your monthly outflow
A common exercise we do when working with people who want to be financially free is to have them write down all their monthly expenses in one column on a piece of paper and then write down their salary on the other. Then, we have them cover the salary column with their hand.
“What,” we ask, “would you do if you didn’t have your salary?” The result is often a momentary flutter of panic.
This is helpful because it is a quick splash of reality-that is, most people have a lot of expenses and are reliant on a salary to pay for them.
But how great would it be if you had passive income coming in every month that covered your living expenses? What would you do then? Would you retire? That’s what Kim and I did when we reached that point in the 1990s.
But to get to that point, we had to know how much we were spending each month. Why? So we knew how much we’d need to make in cash flow to be financially free.
- A budget helps you understand what kind of cash flow you need
Once we understood our monthly expenses, we then were able to make a plan to acquire the assets we needed in order to cover those expenses. For us, this is where we implemented the “pay yourself first” philosophy. Instead of cutting expenses, we created a new one—an investing expense.
- A budget inspires action to get your cash flow
By making it an expense to invest each month, we made it a priority to grow our assets. We worked our butts off to make the extra cash we needed. We started teaching classes on the weekends. We got creative in how we paid our creditors. We dreamed up and launched new products. We found amazing real estate deals.
All of this was made possible by shifting our mindset when it came to budgeting away from saving money to making money. Our budget gave us the roadmap to financial freedom, and we were inspired to make it happen.
So, if you’re ready to begin your journey towards a better financial future, then yes it’s time to start with budgeting. But don’t do it the old school way; do it the rich dad way. Only then will you be really successful.
Editor, Rich Dad Poor Dad Daily