What How You Budget Money Says About You
Want to be rich? Learn to budget like the rich.
One of the biggest indicators of financial intelligence is cash flow. But, it’s not just cash flow that counts, but how you get that cash flow.
The first step in knowing how you obtain your cash flow is to understand your personal financial statement. We recently completed a free resource called “ Get Your Financial House in Order”. In that ebook, you can learn how to create and read your own financial statement, as well as understand the implications of that financial statement, which is your financial report card.
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. And that means starting with a budget.
The problem is that most people have misconceptions about what a budget is and why it’s helpful.
In my experience, there are three ways that people budget. And the way you budget has a lot to say about your financial mindset.
Budgeting like the poor
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.
For those that budget with a poor mindset, they simply track their earned income (i.e., salary) and their expenses each month. What ever is left over, which is often nothing or less, is used for savings in case they run into a rainy day.
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 catalyst for financial insight, inspiration, or growth.
Budgeting like the middle class
Those in the middle class often have more income than expenses (as long they have that high paying job!). They might have a few investments, but they are not a daily focus. Instead, they contribute to a 401(k) they rarely pay attention to 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, which they often use as “discretionary spending”. More often than not, they splurge on vacations, cars, electronics, or something that brings them pleasure—what I call doodads. In the process, they create liabilities but don’t invest in assets.
For those with a middle-class mindset, a budget serves as a tool to make sure you spend less than you make, but also know how much “fun” money can be spent. Yet the source of that money is always earned income from a salary rather than passive income from investments.
Budgeting like the rich
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. In short, they ask, “How can I make more money?” rather than say, “I don’t have enough money?” (the poor) or, “How much extra money can I spend?” (the middle class).
If there are doodads that the rich want to enjoy, they don’t look at their existing income to determine if they can purchase them. Instead, they ask how much more they’ll need to make to cover the expense. Then they find investments and assets to cover the new expenses.
In essence, the first expense in a 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 expense. It all stems from their mindset towards budgets.
Kim and I have budgeted like this for years, and it is a fundamental key to our financial success. If you can master changing your budget mindset, you can master your money.