One of the core components of building wealth is being able to create a budget and disciplinarily execute it each month for a long period of time. Similar to how profit is calculated in business, you would do the same by taking your wages and subtracting your expenses for the month to get to your savings for the month to build wealth. I know tracking all of your expenses throughout the month would seem like an impossible, tedious task, but it is essential.
I would bet that most people don't take the time to budget and keep track of their expenses. Why would you waste your time tracking a quick grocery run, or fast food meal when the whole point was to save time? Your time is clearly worth more than that. But without tracking your expenses and following a budget, no matter how big your income source is, you will not be able to build wealth in the traditional route.
It's always ironic to see people who live a high life of big income and big spending are perceived to be wealthy by others while this may not always be the case. They may live in a luxury new high-rise or dress in designer clothes, but that means nothing when calculating what their net asset is. Paying for a fancy apartment, and leasing the newest cars add zero value to your net asset and are simply just considered an expense. These may be all common knowledge but it's shocking that most people don't understand this principle. All the statistics show personal consumption debt per American or auto lease debt is at an all-time high.
I don't blame them because personal finance and concepts of budgeting are never taught in the education system from elementary to university. I majored in accounting but I have not personally begun disciplinary budgeting until I was in my 30s. I'm not saying you have to restrict yourself from spending money, but creating a budget for this spending so that you can ensure you have money left over for things like savings and investments would be wise.
Traditional building wealth requires having disposable income at the end of each month from your job or other sources of income to invest for the long term. The first component of budgeting is to first set spending categories (I look at it as a money bucket), and the amounts you want to spend on that category each month. The next step is to track all your expenses (literally) to ensure that you know how much you have left over every month in order to maximize this amount.
For example, my typical month may look like this:
First, I have the categories in the first column, my budgeted amounts (buckets) in the second column, my actual spending, and the remaining balance in that category.
Sometimes certain categories might go over budget and I would adjust it by taking a small amount from another category and adding it to another category (i.e. deducting $50 from the restaurant budget and adding $50 to the grocery budget). Trang always says that's "funny business" and defeats the whole purpose of budgeting. But I am not disciplined enough to not buy something because I ran out of money in a budgeted category, but I will do my best to cut down on overall spending towards the end of the month when I start to reach my overall budget limit.
I also do this on Google Spreadsheet as it's cloud-based so Trang can see our budget on a real-time basis. I know there are countless amount of budgeting apps and methods out there, and using any method works. The point of it is to track your expenses so you don't overspend by too much from your monthly income. I've used every dollar app that does the same thing, but I feel more comfortable keeping it on an excel sheet where I can see everything on one page.
Next, I track each line item for my spending for the month.
The date in the first column, Vendor, amount, category, and description of what it was. I also split my spending by different credit cards so that when I pull up the statement, it will be easy to see my recent purchases (i.e. Freedom, Target, Amex, etc.)
(Note: The category in column J is important and needs to spell it exactly as it is shown in the budgeted section as the summary section will use a formula to categorize each spending into the correct bucket).
Summary Section
As shown below, the Actual column will sum everything from each spending. In this example, the formula states =SUMIF(J:J, "Costco",I:I) which is telling excel to add all amounts in column J, if the category says "Costco" and adds the amount stated in column I.
As you can see there is also a miscellaneous one-off purchases section in the above screenshot that I add separately
We all have large expenses that are unpredictable and can't be budgeted. These expenses, I try to limit these, but essentially these amounts would mean that I saved that much less for that month.
In my summary section, the remaining balance is simply budget minus actuals.
I have other tracking sheets that track cumulative savings and cash-on-hand, as well as net wealth tracking sheets, but maybe I'll share those in a future post. For now, I wanted to share my budgeting process due to its importance. I hope you found value in budgeting and a simple method you can create in minutes. The hardest thing is tracking your spending for each purchase as it is time-consuming, but it becomes a habit and an obsession once you get into it.
Obviously, you may miss some that you find insignificant that you excluded. At the end of the day, this is your tool to help you see your financial picture, so it can be as accurate as you'd like it to be.
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