Budgeting & Accounting: Important Financial skills to achieve your Financial Goals
Budgeting and accounting are both very boring subjects when it comes to exercising them in real life to plan your finances. But budgeting and accounting for the domestic consumption is directly related to achieving your financial goals.
Tabulating and charting your monthly and annual expenses in each and every category helps to control your expenses. This also reduces the probability of allocating too many dollars to those products and services that are not really important.
If you want to become financially free and wealthy then you must budget your expenses like governments and business all around the world. You must keep track of each and every dollar you earn.
If you can manage to reduce unnecessary expenses then you can divert that money towards buying some appreciating assets (Stocks, bonds, gold, mutual funds, real estate, online properties, … etc …) which appreciate in its price over time and make you rich and financially free.
Budgeting and accounting are the subjects that are not taught well in our schools and colleges. And that’s why most of the people struggle financially. Both of these skills are important skills to achieve your financial goals.
People who are wealthy today are typically doing both of these exercises for their Business and home every month, for years and till this day to maintain their wealthy state. And they teach their children these 2 basic subjects of money management as well. You should begin to practice these habits early; it does get easier each time because you’ll begin to notice your expenses.
And that’s why their children are more financially independent than the children of high income but low net worth group of people (Upper Middle Class).
What Are Your Financial Goals?
What are your Financial Goals?
If you ask a typical upper middle class person (I am talking about High Income, low net worth group of people) about their financial goals, most of the people will tell you the following.
– Minimize the Tax burden by taking large mortgage loans
This is the prime financial goal of people living in USA and worldwide. They think that taking larger mortgage loans is a smart idea. Because it will reduce your tax liabilities and thus, you will save on the tax.
One of my friends has recently taken a large mortgage loan to save on taxes. But according to me, if he would just budget his household’s monthly finances then he will easily save more money rather than saving on taxes every year.
Most of the people focus on larger things. But they don’t focus on the smaller expenses. If you deduct few of your small expenses every year then you will save much more money than your interest payment on your home mortgage (Only Interest payments on mortgage loans are Tax free).
What I advise people do every month, is to sit down with your spouse or family and write down each and every category’s expenses on a paper. Make category for each and every expense and write down expected spending in front of each category and compare that with actual expenses.
I know that this is very boring. And I personally find this exercise very boring myself. I suggest you find some alternative methods of budgeting your expenses like “Pay Yourself First” method or “Budgeting on Excel spread sheet or *UPDATE* – Quicken
But in any case, budget your finances.
How Much Money Do You Spend?
Do You know How Much you and your family spend each year on Food, Clothing and Housing?
Most of the people in this world will answer this question with a –“No”. But most of the millionaires and wealthy people will answer the above question with a – “Yes”. Remember that I am not talking about Mortgage payments or car loan payments you make every month.
Most High income and low net worth (Upper Middle Class) people will say that they remember each and every important transaction that they make every month, so why worry about small expenses such as food, clothes, and mobile bills?
And these people will also argue that “I am saving on taxes by taking higher mortgage loan so I don’t need to budget because after all I am saving on taxes at the end of the year.”
Well, these are just excuses. Did you know that according to the survey on Millionaire households in USA, almost two-thirds of households know exactly where each dollar that they earn goes every month?
I want to stress the importance of budgeting. It is a very important exercise. Most of the people really don’t know what they really spend their money on every month.
This is very bad in the long run. If you want to be rich, financially free, and wealthy, then you have to plan your every expense. You should take note where that dollar of yours goes every time.
Budgeting: The Long term benefits
Long term Benefits of Budgeting
When it comes to budgeting, all the financial planners and advisors will tell you How important budgeting is and why everyone should do it. Now, all of us know that budgeting is a very important financial exercise but how many of us seriously do budget?
Not even 1% of people get involved with budgeting. In fact, let me tell you my own example. I myself, ru a personal finance blog and advising people to budget their own finances. But Honestly speaking, I personally hate this exercise. Because it’s so boring and nothing is glamorous in it.
So What I do is, I create the environment of economic scarcity for me. I use “Pay Yourself First” Formula. It means that every month I invest 10-15% of my Income for long term investing. And I live with the rest of the money.
I advise you to find some less boring ways to budget your finance like “Pay Yourself First”. Spread sheets, Quicken, or something else. Because there are long term advantages of budgeting and it’s much easier to budget if you visualize the long-term benefits of this work.
There are long term benefits of Budgeting. So You have to find alternate ways to budget your finances if you find it boring. If you have other methods to budget finances, then please share them with the readers.