Budget: The Start of Your Financial Future

The last post offered five simple words to help you start your Dividend Farming operation and build financial security:  spend less than you make.  Genius.  There’s gotta be more to it, right?  There is.

Dividend Farming is a navigation problem, as are many things in life.  All navigation problems have three critical components:

1)  The starting point (A)

2)  The destination (B)

3)  The best route from A to B

        a.  Fastest

        b.  Most efficient

        c.  Most enjoyable

You may know your destination.  However, if you aren’t sure where you are, choosing the best route to arrive at your destination will be challenging.  How do you determine your starting location?  A budget is a great way to figure it out. 

Financially speaking, if you don’t know how much you’re spending or on what, you’ve limited your ability to plan a route to a solid financial future.  This is true because you don’t know where you are as you start your journey.

 

One way to address the problem is to build a budget.  A budget is a valuable tool helping you determine your current financial location.  It’s also a great way to gauge your progress along your route of flight. 

Track your expenses.

But budgeting isn’t fun!  Neither is being broke.

Budgeting is hard!  So is being broke.

 

Fortunately, budgeting isn’t as hard as you think.  You can budget on a piece of paper, in a spreadsheet, or in any number of nice software applications built specifically for budgeting.  I’m a fan of the spreadsheet.  I use Excel at work so I’m familiar, spreadsheets are normally free, and I don’t need a pile of erasers or pencils to change or update my budget.

What is a budget you ask?  It’s a list of items or actions and the amount of money you plan to spend money on each during a specific period.  Total expenses are subtracted from your income during the period.  Below is an example of a simple one-month budget.

January 2019	Budget	Income / Spent
Income (Salary or Hourly)	$3,000
Housing (Rent or Mortgage)	$1,200
Groceries	$800
Utilities	$300
Auto	$500
Total Expenses	$2,800
Income Minus Expenses	$200

Your budget should be more detailed and informative than the example above.  For instance, you may want to list separately many of the following items:

Auto Gas	Water / Sewer Utility	Health Insurance or Deductibles
Auto Insurance	Dining Out	Magazine Subscriptions
Cable TV Service	Movies	Gifts / Charity
Cell Phone Service	Coffee	Home Improvement
Electric Utility	Clothes	Yard Improvement
Emergency Fund	Day Care	School Supplies
Credit Card Payment	School Loan Payment	Gym Membership

The above table may not be directly applicable.  Alternatively, you might need to include everything shown here plus additional lines covering all that’s applicable to you.

Try to capture as many expense items as you can then decide how much you need or want to spend on each for the month.  Once your list has been created, tote up the expenses and subtract them from your monthly income.  If the expenses are larger than the income, work through your lines reducing your planned expenses until the expense total is less than the income total.

Once you’ve done this, your budget is built.  For the rest of the month you’ll record your expenses as they’re paid.  Your budget may look like this table part way through the month.

January 2019	Budgeted	Income / Spent
Pay (Salary or Hourly)	$3,000	$3,000
Housing (Rent or Mortgage)	$1,200	$1,200
Groceries	$800	$550
Utilities	$300	$150
Auto	$500	$300
Total Expenses	$2,800	$2,200
Pay Minus Expenses	$200	$600

Budget to save.

The example above could be 20 days into January.  You’ve received all your pay, made your housing and auto payments, and bought most of your groceries as well as part of your utilities for the month. 

In this case, you’re tracking to your budget.  If you maintain course, you’ll have $200 left at the end of the month.  If you don’t have an emergency fund the money should be used to start one.  If you have a solid emergency fund, then $200 can be used as seed money for your Dividend Farm.

 

Each month you’ll go through the same process.  Fortunately, budget building gets easier because many of your expenses won’t change from month-to-month allowing you to copy expense items from one budget to the next.  For instance, your house payment won’t fluctuate monthly nor will things like car payments or insurance in many cases.

Budgets are the secret to “spend less than you make” and the first step on the road to a Dividend Farm and financial security.  Is it magic?  No.  Do you have to use a spreadsheet or pencil and paper?  No.  Some people use envelopes labeled by category.  They put cash in each envelope equal to the amount they plan to spend.  Once a specific envelope is empty, no more money can be spent on that category until the next month when the envelope is filled again. 

Does budgeting require patience and time?  Yes.  Is it worth it?  Yes – particularly when the compound growth of your Dividend Farm kicks in.  At that point you’ll be thrilled you budgeted, saved, and created seed money for your farm.

The thoughts and opinions expressed here are those of the author, who is not a financial professional.  Opinions expressed here should not be considered investment advice.  They are presented for discussion and entertainment purposes only.  For specific investment advice or assistance, please contact a registered investment advisor, licensed broker, or other financial professional.