Budgeting and Personal Financial Planning
Would you like to be a millionaire?
Most people would love to have a million dollars. If you had a million dollars you might be able to quit your job, do the things you’ve always wanted to do but couldn’t afford, and feel financially secure.
Will planning and budgeting make me a millionaire?
There are no guarantees in life, but by using good personal budgeting strategies and personal financial planning, becoming a millionaire is definitely possible.
How can I be so confident about it?
Simply because it’s true under the right circumstances, and I don’t mean the right circumstances such as making over $100,000 a year for 50 years. If you have an income, time, and plan correctly, you could make a million dollars. Don’t believe me? Look at this.
Let’s say you are 30 years old, single, and you have a job earning $50,000 per year. You pay about 25% in taxes equal to $12,500 which leaves you with $37,500. Including a mortgage payment, electricity, water, gas, insurance, food, recreation, and all other expenses you spend about $2,500 per month or $30,000 per year which leaves you with $13,500 per year in net cash flows.
Income $50,000
Taxes $12,500
Expenses $30,000
Net Cash Flows $7,500
Let’s say you spend $1,500 on vacation and have $6,000 per year left over. Now you take that $6,000 and put it into a mutual fund making an average of 8% per year. You leave the money in the mutual fund to compound and continue to earn money for 35 years until you are 65. Guess how much money you have now?
$1,033,900.82
That’s just over a million dollars. I know what you’re thinking, who can afford $6,000 a year? Or maybe, I’m way over 30 I don’t have that much time! Maybe you highly doubt you could consistently make 8% on an investment.
Actually, the historical average return on the stock market is over 10% which means even if you could only afford $4,000 per year at 10% you would still make $1,084,097.47.
If you are under 30, it’s more likely that you make less than $50,000, but you have more time to invest and collect more interest. If you are older, you might make more, but have less time and it could still even out.
What if you have a family and you can barely pay off your credit card debt?
This is where budgeting comes in. If you can’t afford the life you’re living, you either need to cut back on your spending on frivolous things, or downgrade your lifestyle. If you still can’t cope, it might be time to look for another job, even if that means going back to school to get an education.
Some people seem to get all the luck. There are born into a wealthy family, get a college education handed to them, become a doctor or other high paying profession, and never have to struggle with money. Others seem to fall into debt no matter what they do.
The truth of the matter is, you are in charge of your own destiny. You may be left with a large burden of taking care of your family or you might have made some bad mistakes putting yourself into heavy debt. You are responsible for helping yourself. You can only make so many excuses. Maybe you won’t be able to become a millionaire, but if you can get out of debt and begin a retirement plan, you are still much better off.
You do what you have to in order to stay financially sane and you only stand in the way of yourself by making excuses.
I have the funds to begin saving for retirement. Now what do I do?
You need to make a plan. First, pay off any debt you have. The only type of debt that is okay to keep is a mortgage, but even that you will want to pay off eventually. I’ve heard about people taking out second mortgages just so they can get the tax savings. I’m sorry to break it to you, but you will still be spending more in the long run.
After you’ve paid off your debt, you need to save up an emergency fund of 3 to 6 months of your living expenses. This is very important. You need to know that if you lose your job or have a large unexpected expense, you won’t go into debt again.
Once you’ve finished paying off debt and building an emergency fund, you need to make and assess your goals. Here are some questions to consider:
- How many years do I have until I retire?
- Should I start a college fund for my kids?
- How much money should I invest?
- What types of investments should I make?
- What are my short-term and long-term goals?
Do some research on different investment types such as stocks, bonds, mutual funds, and real estate.
This is your future you are planning out. Do you want to retire and spend your time traveling, taking long vacations, and fulfilling all your lifetime hobbies, or do you want to spend all your time at home watching t.v. because you can’t afford to do anything?