The Budget Rule Wealth Builders Swear By (That Has Nothing To Do With Cutting Coffee)
As the cost of getting coffee out has increased over the years, it has unfairly become a symbol of budget excess. If simply skipping your daily cup of Joe is enough to achieve financial balance, who would even need a budget?
Financial professionals explain that what actually moves the needle aren’t small indulgences. One rule is most likely to help build wealth and you can drink your coffee too.
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Pay Yourself First
Rather than trying to save whatever happens to be left at the end of the month, there’s one reliable rule, according to Jared Colao, certified financial planner (CFP) at Edward Jones.
"Pay yourself first. Before a single bill gets paid or purchase gets made, have a set percentage of your income go straight into savings or investments, automatically,” he said.
If it sounds almost too simple, he said it works because it removes willpower from the equation. Before long, your spending will naturally adjusts to what's left and your strategy can work in the background.
If you’re interested in saving that money in something other than a high-yield savings account, consider a Roth IRA or brokerage account so it's harder to touch, added Johnathan Ness, certified public accountant (CPA) and founder of Know Money, Yes Money.
Prioritize that rule and then make some of the following budget decisions to build on it.
Building Wealth Is About Bigger Financial Decisions
Cutting your coffee habit on its own isn’t going to make a noticeable difference, however some fixed costs are, according to Michael McAuliffe, president and founder of the nonprofit agency, Family Credit Management.
"The top areas of anyone's budget are always going to be housing and transportation,” he said, which also tend to grow the fastest as people get raises and new jobs. However, you can only cut back so much on those areas.
“What you should be looking at is cutting out spending you don't care about," McAuliffe said. Discretionary expenses that don’t improve your life or contribute to your future are where to look first for cuts.
Give Every Dollar a Job
To have a successful budget you don’t have to say no to everything.
“Budgets fail when people try to cut everything at once,” Colao said.
You just need to decide in advance which purchases deserve your money and make sure your spending reflects your priorities. Or as McAuliffe put it, "All of the money you have coming in should have jobs” — particularly for necessities or for your future.
He suggested walking around your house and imagining the dollars you spent on each item and asking yourself, “Will I be pleased with myself for giving this dollar this job or will I have regret?"
If this leads to feeling deprived, Ness suggested putting into the budget “money that's expressly meant for fun."
The Biggest Budget Mistake
One of the biggest threats to wealth is increasing lifestyle every time your income rises.
McAuliffe recommended to everyone, regardless of how much money they make, to “genuinely live like you don't make as much money as you do, no matter how much your income grows over the years."
Ness pointed out that even high earners are susceptible to lifestyle inflation, stating that a decent amount of people making $300,000 to $500,000 can find themselves living paycheck-to-paycheck.
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One Simple Budget Reset You Can Make This Month
Consumers don't need to overhaul their finances overnight. The experts recommended a few simple steps below for a budget reset.
Audit all your expenses: McAuliffe recommended gathering the last three months of your bank and credit card statements and going through them line by line. “Be extremely honest with yourself.”
Automate transfers: Colao recommended setting up one automatic transfer for the day your paycheck lands, even if it's only a small amount.
Redo your budget: Ness recommended a budget redo, particularly focusing on the bigger (non-fixed) expenses. “Think of at least two different ways you could cut it.”
So, go ahead and enjoy your coffee — just make sure your savings get paid first.
This article was provided by MoneyLion.com for informational purposes only and should not be construed as financial, legal or tax advice.