Updated on August 2, 2007
Building Wealth Workbook – Part 3 – Budget to Save
Please read Part 1 of the Building Wealth Workbook.
- Part 2: Wealth Creation
- Part 3: Save and Invest
What would you like your net worth to be
5 years from now? P ___________
10 years from now? P__________
Set Financial Goals
Most people who have built wealth didnâ€™t do so overnight. They got wealthy by setting goals and striving to reach them. Juan set two short-term goals: (1) to save P 100,000 a year for three years to have P300,000 for a down payment on a house, and (2) to pay off his P30,000 credit card debt within two years. Juan also set two long-term goals: (1) to save and invest enough to have P 5,000,000 in 15 years for his childrenâ€™s college education, and (2) to have P150,000 a month to live on when he retires in 30 years.
A personal wealth-creation strategy is based on specific goals. In preparing your goals:
- Be realistic.
- Establish time frames.
- Devise a plan.
- Be flexible; goals can change.
On a sheet of paper, list your top goals.
My short-term goals are:
My long-term goals are:
Now you, like Juan, can choose how to meet those goals. This is where budgeting to save comes into play.
Develop a budget and live by it
When it comes to finances, people generally fall into the following groups. Where do you fit in?
Planners control their financial affairs. They budget to save.
Strugglers have trouble keeping their heads above rough financial waters. They find it difficult to budget to save.
Deniers refuse to see that theyâ€™re in financial trouble. So they donâ€™t see a need to budget to save.
Impulsives seek immediate gratification. They spend today and let tomorrow take care of itself. They couldnâ€™t care less about budgeting to save.
Knowing what kind of financial manager you are will help determine what changes to make. To maximize your wealth-creating ability, you want to be a planner, like Cecille.
Cecille is a single parent with one child. â€œI have to budget in order to live on my modest income. I have a little notebook I use to track where every dime goes. Saving is very important to me. When my son was born, I started investing every month in a mutual fund for his college education. I am proud to say that I control my future. I have bought my own home and provided for my son, and Iâ€™ve never bounced a check. You must have common sense regarding money!â€
Becky, by contrast, is an impulsive. Becky has a good job, makes good money and lives a pretty comfortable life, but her bank statement tells a different story. She has no savings or investments, owns no property and has no plans for retirement. Plus, sheâ€™s got a lot of credit card debt, lives from paycheck to paycheck and doesnâ€™t budget.
You can choose to be like Becky, or you can follow Cecilleâ€™s road to wealth creation by learning to budget and save.
A budget allows you to:
- Understand where your money goes.
- Ensure you donâ€™t spend more than you make.
- Find uses for your money that will increase your wealth.
To develop a budget, you need to:
- Calculate your monthly income.
- Track your daily expenses.
- Determine how much you spend on monthly bills.
Track Day-to-Day Spending
One day, Becky, the impulsive, realized that to create wealth she had to become more like Cecille and plan her financial future. To start, Becky analyzed her finances to see how much money she made and how she was spending it. She set a goal to save P4,000 a month to put toward her wealth-creation goals. First, she calculated her income. Then she added up her monthly bills.
She also carried a little notebook in her purse for jotting down her daily spending, whether by cash or debit card, check or credit card. Here is a page from her notebook.
You can study your own spending habits by using this sheet to track daily expenses.
Choose from these two versions: [download#2#nohits] or [download#3#nohits]
Be sure to include items purchased with credit cards, as well as those purchased with cash, debit card or check.
Get a Handle on Income and Expenses
Becky used the information from tracking her day-to-day expenses to develop a monthly budget. When Becky reviewed her budget, she realized she was spending more than she earned.
Becky knew if she were ever going to save P2,000 a month, she had to cut her expenses, earn more money, or both. She worked overtime at her company, which increased her take-home pay. She bought fewer clothes, discontinued cable TV channels, carpooled to work to cut gas consumption and reduced her spending on eating out and entertainment. Tracking her expenses paid off. Becky successfully developed a budget that enables her to save P2,000 each month.
Here is her budget. If Becky sticks to it, she will have P2,000 a month that she can:
- Put in a savings account.
- Invest in stocks, bonds or mutual funds.
- Use to pay off debt.
These are just some of the wealth-building choices available when you budget to save.