Follow a Budget - Simple ideas to control your spending

The first step of my 6 step plan is easy. There's a simple rule you need to follow no matter how much money you make:
Live within your means. Spend less money than you make.

How much you get paid every year is not a measure of your wealth. The number you need to concentrate on is the difference between what you make and what you spend. I call it your wealth potentialMaximize your wealth potential and you're well on your way to financial freedom. Sounds simple enough but most people don't follow it. With every promotion and pay raise comes more expensive toys, flashy new cars, more huge tabs at the bar. These things may make you feel rich but in reality they're keeping you in the poor house.

"We are not rich by what we possess but by what we can do without." 
— Immanuel Kant

Think about your personal finances like a business. The success of a business is measured in how much profit they make. Profit is what's left over after all the expenses are paid. Would you want to own a convenience store where your monthly rent was consistently higher than your sales for the month? You'd be out of business quickly. You might think someone earning $200,000 a year is rich but if they spend all of it on expensive cars, meals, vacations, and rent they have no wealth potential. They'll be broke the minute their high-paying job dries up. We've all heard stories of celebrities who have blown through their money and hit rock bottom after making millions. Check out what MC Hammer is doing to earn a buck right now.

How do you break this vicious cycle? You need to create a budget and follow it. You don't need a complicated system listing every possible category you spend money on. Make a simple plan and follow it. Grab a sheet of paper or a spreadsheet and list out your monthly expenses. If you need some automation try out a program like Quicken.

Your budget categories must be a percentage of your income. Strive to spend no more than 50% of your income on all your expenses (rent, food, car payments, utilities, entertainment). It's not feasible for all of us to live on Airman Basic pay but who says you have to blow through all of your promotion and bonus money? By making your budget a percentage of your income, your living costs can only increase as a fraction of your income.

What can you eliminate? We all need a place to live and food to eat but you can take simple measures like going out to eat only one day a week (cooking for yourself is healthier), taking a lunch to work, finding more sensible places to shop, or maybe only going out to eat for dinners on your next TDY. One of the biggest money pits is buying a new car. Did you know it drops 20% in value when you drive it off the lot? If you think your is car an investment let me set you straight right now. Investments are assets that pay you money later. Cars, electronics, clothing, and rent are all expenses. Even your mortgage payment is considered an expense. There's no guarantee your house will appreciate in value, your mortgage payment needs to fit within your budget.

Here's a simple example of why you should trim the fat from your budget... instead of buying that $5 Starbuck's Latte every morning before work brew your own coffee and take it with you. Seems like a small sacrifice right? If you invested that $5 every week day, in 20 years it will be worth over $72,000! Ask yourself "Is that expensive coffee worth delaying my retirement for a full year?" I'm not asking you to stop ever spending money on yourself but list out what gives you the most pleasure and trim down the rest. For me, it's travel. I'll never regret money I spend on a vacation so I'll gladly make some small sacrifices in other areas to save up for my next trip.

Create your budget and stick to it. Plan for upcoming expenses. If you have a big upcoming expense, start saving now. USAA allows you to open as many saving and investment accounts as you want. For example, if I were going on a vacation in 12 months and knew I wanted to spend $3,000 I would start a vacation fund and set up an automatic transfer to pay myself $250 out of every paycheck, it's harder to spend money when it's not burning a hole in your checking account. Out of sight and out of mind. The goal is to not take on long term credit card debt to cover big ticket items. Plan as much as possible.

We'll get into investing later but for now you need to break your bad habits, trim the fat from your spending and put all your energy towards completing the next step.

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