Budgeting our money can actually make us richer. How is this possible? It happens in three stages: after we know how much we are actually earning, we can become familiar with how to spend our money, and ultimately use our earnings as a tool that allows us to save for what we want. Finding this balance will allow us to increase our overall sense of financial well-being. The result — us feeling more in control of our finances, and thus more satisfied financially.
1. We know how much money we actually earn
If we earn $50,000 a year but don’t create and follow a budget, then all we know is how much money gets deposited into our account. We’re not thinking about our gross pay and our net pay. We’re not paying attention to taxes, insurance, deductions, and any H.S.A. or retirement savings that are being or could be pulled out of our paycheck. In fact, we only really look to groan at how little of our earnings we are actually receiving.
If we paid a little more to ourselves in our health savings account or our retirement account, we could be paying less in taxes on our remaining earnings. This switch to paying ourselves more using pre-tax money might even pay for itself in after tax savings, giving us close to the same amount of taking home pay. Also, it could be that we are getting a good sized tax return every year, suggesting we could pay less in taxes every paycheck. It is critical to know both our gross and net pay so both can become part of a working budget.
Knowledge can be powerful. Once we know how much our gross earnings are, then we can figure out how much our employer is paying on our behalf for insurance and retirement. We can work out the math to make sure we are paying the right amounts to secure any free matches our employer is offering. As an example, if our employer matches our retirement savings up to 6 percent, but we are only paying 2 percent into our retirement savings, we may want to add an additional 4 percent to get the rest of the free money. With our additional 4 percent savings, we go instantly from saving 4 percent to 12 percent of our income.
Having this knowledge is also critical when it comes to comparing our current jobs against other employment opportunities. Knowing how rich our benefits are and how much our employer contributes towards them offers a clear picture of our entire package. This allows us to understand our earning power in different employment scenarios and puts us in the driver’s seat.
2. We know where our money is going
I remember once hearing someone say they wished they had enough money to never worry about how they spend it. I remember thinking, “They are missing out on the power of budgeting.” Regardless of how much, or how little money we earn, knowing where we spend our earnings is critical to our financial empowerment. Keeping track of all of our expenditures puts us in control. We can actually know where every dollar is spent. How does this make us richer? Because we take control of the financial decisions ahead of time before the decisions are made for us. Our budget reflects our money decisions before we spend our money. Let’s say we decide to budget $400 month for food. Then we notice between eating out and buying groceries, and we actually spent $800 this month. Because we have a budget, we can either adjust how much we spend for food up to $800 by taking away money in our budget from another category, or we can start to pay more attention and make cuts to stay within our existing budget. If we didn’t have a budget, we wouldn’t know we overspent by $400.
Once we decide to begin budgeting, we can keep track of our finances in numerous ways. We can plan electronically using budgeting apps, building spreadsheets on the computer, taking pictures of our receipts and categorizing them, or good old-fashioned paper and pencil. Regardless of the method we choose, the important thing is to keep track of our purchases. Then we can reconcile and see if the amount we had written down in our budget to spend within each category equals how much we actually spent each month for every category. If not, we can make adjustments to our categories or to our spending. We can say, I choose to buy this (or not to buy this) because I know how much money I have set aside for this category.
3. Money becomes a tool that allows us to save for what we want
Once we know how much we are earning and how much we are spending, then the fun can begin! We have become the masters of our destiny by deciding beforehand where we will spend our money, and actually spending according to plan – or as close as possible. This opens up the door to begin dreaming about the things we have always wanted, but never thought we could afford. Once we create a line in our budget for dream X, Y or Z, then that dream begins to become a reality. Perhaps we can only afford $1 month to begin saving for the dream, but that dream now has a seat at the table.
By having a seat, something magical happens. Suddenly, the extra $5 or $10 being spent on whatever else, is easily sacrificed to be able to fund an extra $5 or $10 toward the dream. Priorities shift and we find ways to get more of what we want by spending less on what we don’t want as much.
This is the stage where all sorts of tricks can come in handy. There are two tricks frequently used — pre-loading monthly budgeting amounts of money on different cards with terminating balances or putting cash in different envelopes for different budgeting categories. Doing so can help stop ourselves from overspending on the mundane to truly save for the important. The important is whatever we deem it to be, whatever dream X, Y or Z is. The result is the overwhelming feeling of happiness when we meet our first goal. We quickly find the feeling of financial empowerment intoxicating and we can decide to list the next dream on our budget to begin funding it.
To recap, budgeting makes us richer in at least three ways. We know how much money we actually earn, we know where all our money is going, and money becomes a tool to save for what we want.