One Simple Thing You Can Do to Start Budgeting Today

By Matt Bell on 20 May 2016 0 comments

For people who've never done it, the idea of putting together a budget feels like a lot of work and certainly not much fun. It's why I don't recommend starting with logging every expense. That will feel like work.

Instead of starting with the nitty-gritty spreadsheet stuff, start with the big picture. The really big picture. Here's one simple thing you can do to get a glimpse of your financial potential.

Money Plus Time = A Lot of Money

Consider this: If you're 32 years old and your salary is $55,000, by the time you're 70, it's realistic that you will have earned over $3.8 million! Try this exercise yourself by plugging your current age, planned retirement age, current annual income, and assumed annual salary increase (I used a 3% in the example above) into this calculator.

Starting with the big picture will give you a sense of how the seemingly small steps you take today will be magnified over time. Keep yourself gainfully employed, earn a small raise each year, and you'll generate a lot of income over your lifetime.

By nature, we don't tend to think long-term. For many of us, it's difficult to imagine the future. But it can be very motivating to do so.

Some Practical Examples

Think about investing. I remember reading a column by one of my favorite financial journalists in which he talked about the day someone introduced him to the power of compound interest. He had never heard of it before, but when he saw compounding in action, it was as if a light bulb switched on above his head. It motivated him to find the money to start investing.

In your first years investing, compound interest may not seem like much of a big deal. But give it some time, and it turns into a very big deal.

Let's say you're 20 years old, start investing $200 per month, do that for 50 years, and generate an average annual return of 7%. After 10 years, you would have invested $24,000. But because of the power of compound interest, you will have earned about another $10,000. Nice, right? Sure, but it's not yet hugely impressive.

Now let's run the example out 50 years. At that point you will have invested $120,000 — a great accomplishment in itself. But because of the power of compound interest, it will have turned into over $1 million. Now, that's impressive.

But what if you can't find $200 to invest every month at age 20? Besides, you figure, you're young; you can afford to wait. Finally, at age 30, you start investing $200 per month, do that for 40 years, and get that same 7% average annual return.

You've only invested $24,000 less than if you had started at age 20. However, because you started 10 years later, you end up with about $500,000 less!

This same type of thinking can be applied to every aspect of your financial life, understanding the future value of every dollar you spend or (hopefully) invest today. What types of vacations would you like to take? How much of your kids' future college costs would you like to cover? Thinking big is the starting point. Then those goals can become part of your monthly budget.

It Works Both Ways

Of course, a lifetime of financial miscues can really add up as well. Think about the negative magnifying impact of consumer debt. Let's say you have a $6,000 balance on a credit card that charges you 18% interest, and you carry that debt from month to month, making just the minimum required payments each month (we'll assume it requires a minimum payment of 3% of the balance). It'll take you more than 17 years to pay it off, and you'll end up paying $5,700 in interest!

But if you could put $300 toward your debt every month, you'd be debt-free in just two years. Run some what-if scenarios to see how much faster you could get out of debt. What if you could put an extra $20 toward your debts each month, or an extra $50?

Using a budget can help you find that extra money, and it can help you more intentionally manage your use of credit cards so you never carry a balance from month to month again.

Translating the Big Picture Into the Day-to-Day

Wouldn't it be a shame to look back on your life and wonder, "What happened to all the money I made?" By the same token, wouldn't it be satisfying to look back and know you made the most of your financial opportunities?

Getting a feel for your huge financial potential can be very motivating. Be sure to take the next step, though, and turn that potential into a plan by getting started with a budget today.

Do you keep a budget? If not, why not?

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