The importance of spending time creating a budget is lost on some investors, but it can be the difference between financial freedom and failure.
Blogger: Helen Collier-Kogtevs, Real Wealth Australia
When it comes to taking control of your personal finances, the sad reality is, most people prefer to bury their head in the sand.
In fact, when I surveyed thousands of property investors about budgeting, 54% said they had no budget at all. Imagine that – more than one in two do not monitor their spending!
I can empathise. It can be confronting and uncomfortable to face the reality of your own financial situation. Personally, I avoided it for a long time, living on credit cards and personal loans and ignoring the fact that my savings account balance never rose above $1,000.
But all of that changed when Ed and I decided to get serious about property investing. The first thing we did was create a budget to monitor our spending. At first, the results weren’t pretty, but slowly we chipped away at our debts and within 12 months, we purchased our first investment property.
Now, when I work with new investors, one of the first things we do is review or create a budget.
Because, let me put this way: how do you expect to create wealth if you don’t know how to manage your money?
How do you know how much you can afford to spend on an investment property, if you don’t even know how much you currently spend on your own household expenses?
I can’t stress enough the importance of investing the time to create a budget, so that you know where your money goes. This really is a vital step that you can’t afford to skip. Budgeting really is a key ingredient of wealth creation, therefore you need to find the time to do it – and properly!
Far too often, people opt to plead ignorance when it comes to personal finance, as they view budgets as being limiting or restrictive.
But I view budgets as being the exact opposite. Budgeting shouldn’t be a negative experience – it should be empowering!
Monitoring your spending gives you an indication of where you can make improvements and trim your budget, but it’s not about cutting out “life’s little pleasures”. If buying a cup of coffee on the way to work every day is important to you, then you don’t have to give that up.
However, if you complete a budget and discover that you buy a morning coffee, plus a sandwich and a drink for lunch, and a magazine twice a week to read on the train home… well, that’s around $75 a week – or $4,000 a year.
Factor in a lunch date here, a new dress there and takeaways two nights a week, and you can easily rack up $250 a week. That’s over $10,000 a year, blown on fun yet non-essential discretionary items.
And you thought you couldn’t afford to invest in property?!
Until next time, happy investing.