The article will guide you step-by-step on how to start your financial budget. If you already have over $5,000+ in Investment Money put back, you can skip past this article. However, since the intention of this article is to be able to help everyone, I’m starting at the beginning. Also, there are a variety of sub-topics covered in this article that may be beneficial to you even if you do already have enough to begin investing. To be successful at anything in your life you have to be committed and informed. Investing in Real Estate (or anything else) is no different.
Creating and sticking to a budget is the most fundamental act that an investor can do. A budget forms a basic chart of your income and expenses. It can also be used to track and monitor bill payments. Budgets give you a visual idea of what you can do with your money using it as a guide to better manage your money. To get yourself going in the right direction, however, you’ll need to make sacrifices. If you work hard and sacrifice now, then you have the opportunity to be your own boss, retire early, and enjoy life as you should! The following Step-By-Step guide will get you to where you want to be.
A Budget is a fundamental guide…
The first thing you have to do is grab a piece of paper and something to write with. Creating a budget may seem like a pain at first, but as you learn to manage your money you’ll start to enjoy updating your budget. If you’ve every balanced a check book, then you already have a basic understanding of Budgets. If you’re following my guide from the beginning, then you shouldn’t have a clue. Below is a layout of how you can create a Budget Report. Converting it to a text file on your computer (if available) is a very nice option as you then only have to change the values and not have to recreate the whole template every time.
The first section is just a header:
Last Updated – 09/01/06
This next part you shouldn’t have to worry about for the time being. However, its purpose is to track a “Cushion” in your checking account. NSF fees can be nasty and getting them reversed if it wasn’t your fault can be a pain. So it’s better to have a “Cushion” to help protect your account from those fees. Ideally, you’d maintain a minimum of $100 in this cushion. This is also a form of ‘Sub-Accounting’ where you’re breaking the balance in your account down into additional sub-accounts even though such accounts don’t actually exist. This allows you to go ahead and subtract other values out of your total balance so you don’t accidentally forget to take them out at the end:
Main Checking Account Cushion Balance: $ 0.00
The following part will vary depending on how you get paid. However, if you don’t get paid weekly, it’s still advisable to have a weekly budget balance so you don’t run out of money between paychecks. Your weeks should always start with the day you get paid. Remember to always pay on your bills when you get paid. Take the total bill and divide it by the times you get paid in a month. This is how much you will pay on each bill when you get paid. The below assumes you get paid weekly which would be 4 paycheck per month. Round deposits down to the nearest $5 and round deductions up to the nearest $5:
Current Weekly Budget Balance – 09/01/06
Always include the date for each week for cross-checking.
+$150.00 – Deposit
In this case, the deposit is a pay-check (assuming roughly minimum wage) of $154.50.
-$ 5.00 – Phone
assuming a $19 phone bill. 20 divided by 4 = 5 dollars/wk.
-$ 15.00 – Cable
assuming a $56 cable bill. 60 divided by 4 = 15 dollars/wk.
-$ 40.00 – Power
assuming a $157 power bill. 160 divided by 4 = 40 dollars/wk.
-$ 50.00 – Car
assuming a $196 Car/Insurance bill. 200 divided by 4 = 50 dollars/wk
-$ 40.00 – Misc.
assuming $159 in other expenses (such as gas, food, and rent). 160 divided by 4 = 40 dollars/wk.
$ 0.00 – Balance
In the above case, we indeed up with a balance of zero which will be common in the beginning. In actuality, we had ~$7.75 left over that we lost track of due to rounding. This is magically whisked away into our Account Cushion. If you don’t have a checking account yet (and you shouldn’t if you’re following the guide), then you’ll simply notice this as extra money in your pocket at the end of the week. Chances are you’ll use it because the MISC. assumption wasn’t very realistic (especially if you’re not receiving any government aid). The above doesn’t even include rent on a place to live on your own. So you can see how living on minimum wage isn’t even feasible. Naturally you could do away with the cable, but that’s still not going to add up to a rent payment. The important lesson to be learned here is that if the amount of money that you bring in each paycheck is less then the total value of bill payments, then you need to sacrifice one of your bills. In the above case it would by Cable and Phone, if nothing else, just to give you a positive cash flow. If you break-even and don’t generate a positive cash flow, then you’ll never get ahead. If you’re generating a negative cash flow, then you’re heading toward the stress and anxiety of ultimately having to go through bankruptcy and damaging any chance of investing in anything for the next 7+ years at minimum.
From here, you should add a Payment History. This lets you track each payment and how much balance remains after each payment. This is a break down of the sub-accounts listed above. When possible, you should always pay more on your bill to create a Cushion in case you get sick and come up short one week. The last thing you want is to interrupt your positive cash flow. Paying ‘up’ on your bills become even more advantageous when dealing with loans as you can reduce your total debt-over-time by applying additional payments to the principal and there-by reducing that which interest is calculated from. We’ll get more into that later.
For now you should start trying to build a Cushion. You’ll want to build at least $225 before continuing to the next article. Next, we’ll open a bank account (both Checking and Savings), take out your first small loan, and start your credit.
Article III will cover opening a bank account and starting your credit…