The post was written by Alex Stavrou, a personal finance blogger that helps and inspires people to succeed
Organizing your money can be one of the most important things you could do for your finances. Budgeting will help you track your spending, save for retirement, and help set money aside for a special occasion. Yet, what budgeting cannot do is make you wealthy. Budgeting is simply a way to manage your finances and should not be confused with something like investing.
Budgeting is not investing; it is a method of setting aside portions of money to pay expenses and to help prevent overspending. By itself, budgeting will not generate cash flow for you, and it certainly will not make you any wealthier. Some people trap themselves in thinking that doing a severe budget plan will increase their income. Of course, this can be true to a certain degree, the reality is, however, that it will not be enough for you to increase it substantially. To do that you are better suited focusing on more productive measures like your education.
There are several reasons why budgeting won’t make you wealthy, but I find people focusing on it instead of pursuing what really will: passion, education, and work ethic. The budget mindset will get you nowhere, and I will prove it by explaining exactly how budgeting isn’t enough to build wealth.
Wages Aren’t High Enough
In the United States, wages have not risen enough in the last 40 years to outpace inflation. $4.00 in 1974 is equivalent to the purchasing power of $23.00 today. What this means is that American workers earning an average wage today are making the equivalent to what people were making 45 years ago.
But that’s not all, the cost of living has gone up considerably since then as well. The cost of food, education, and housing have skyrocketed since the 1970s. whether it's the 50-30-20 budgeting or the zero-sum budgeting method, their way to wealth would require some serious cutting back on either food, housing, or education; all of which are no easy task.
The average rent in NYC in the 1970s was around $300, now that number can be a high as $5,000: the cost of living has outpaced averaged earnings. To live in NYC, you would have to find an apartment far enough where the rent drops below $1,000. Otherwise, your chances of saving any money with an average income are non-existent.
Budgeting Has Its Limits
When a business owner opens for the first time, their plan may be to make a certain amount of money per year; but in the long run, the business’s goal is to make infinite returns. Theoretically speaking, there is no limit as to how much a business can gross. Yet, your budget is entirely dependent on how much money you already make.
For example, someone making $40,000 a year, budgeting 20% of that monthly income into savings will equate to around $600. If you try and save more than that, your savings will start leaking into your other funds. Things like housing and food are necessities, so you can’t just sacrifice them to increase your savings.
You could, however, if you owned a business, reduce your expenses to increase profits. Business owners can subsequently market their product, increasing sales and revenue putting more money into their pockets. The amount you can budget is limited, but the amount you can make through a business is boundless.
Inflation Will Destroy Your Savings
Unless you have your money invested in an asset like stocks or real estate, your returns will get chewed away by inflation. The prices of goods have been outpacing the average wages of workers for decades now. Together with the cost of living, inflation will ruin any chance you have of saving your money and keeping it.
For you to save money and have it still been worth something; you must make sure your money’s buying power never weakens. To do this, you’ll eventually be forced to invest your capital into assets like stocks or real estate. Budgeting your way to wealth with an average wage may not be realistic. But if you invest your money into stocks and real estate; you will have a greater chance of fighting off the effects of inflation.
For someone looking for a place to put their money, the stock market is my choice of preference. The stock market is good for someone with little capital and plenty of time left to work. For example, the S&P 500 has an annual return of 8%-10% each year. If you were to put $1,000 into an index fund; adding $600 to it monthly will allow you to retire a millionaire in 30 years. By doing this, your budget can help you outpace inflation and establish a decent retirement fund for yourself (real estate is good as well, but it will require a little more active work on your part).
How Do the Wealthy View Budgeting?
Most of the wealthiest Americans today through the media are seen with their private jets, yachts, and enormous mansions. But what you may not know about them is that they can be some of the biggest advocates for budgeting. The difference is that the wealthy have a different mindset when it comes to thinking about their budget.
For example, Warren Buffett is well known throughout the financial sphere and has made billions through the strokes of his investing brilliance. Buffett is one of the biggest supporters for having a strong budget (if you’ve ever seen his car, you’d know what I mean). He even goes to eat at McDonald’s every morning and bases his order on whether the market opens down or up.
The main difference between how Buffett views budgeting and how someone else does is that Buffett sees it in a similar way to how he buys his stocks. When Buffett researches a stock to buy, he does so based on how cheap it is relative to the stock market’s actual price. If the market is saying something higher than what he calculated, the business is too expensive for him to buy.
Buffett’s daily budgeting habits are paralleled into his mindset as a businessman. A good businessperson will try to budget as much as possible to find a way to cut expenses and increase profits. The businessperson, however, does not see personal budgeting to build wealth; but as a way to influence the decisions, he or she makes for their enterprise.
What to Do Instead of Budgeting: Educate Yourself
Educating yourself is one of the best things you can do to increase your income. The wealthiest people on this planet have built their fortunes through some type of education; whether it be a formal one or not. Even if you can’t afford a formal education you should continually be trying to learn through books. Reading books can be the best way to gain a good perspective on topics you’re trying to grasp.
The more you read, the more knowledge you will gain; and with more knowledge, you will have a better sense of how to become wealthy. Read books on history, finance, literature, science, and anything you can to help stimulate your mind.
Graduating from a respected university will also allow you to enter a career of your choice with a competitive salary. Having a competitive job is a great way to build wealth since you will have a high salary and the potential to earn more money.
Start Your Own Business
The ability to start and manage a business may not be an option for everybody, but if you can find a way to start one and have it become successful, you’ll have a great chance of building wealth. The good news is that with the internet today, not every business will require a massive loan to get started.
Many businesses today began from the comfort of people’s homes, so if you have an idea for a business don’t be afraid to go for it. If your ambition and work ethic are strong enough, the money will make its way to you in the end.
Most wealthy people have made their billions through either as founders and investors in their business or by selling it off to potential buyers. Unlike with budgeting, starting a business gives you full control over how much you make. It may not be easy but increasing your income this way is probably the most effective method to build wealth.
The Bottom Line
The idea that budgeting will help you get wealthy is flawed. Wages are stagnating and the cost of goods and housing is considerably high. You can only budget relative to the amount of money you make per year. So, if you’re stuck at a job that doesn’t pay very well, attaining wealth may be an insurmountable challenge. The best way to build wealth is to educate yourself and either get a high paying job or start a business.
To budget your way to wealth will take too much time: your time is more valuable than any amount of money you will save budgeting. You’re better off focusing your time and efforts into educating yourself and launching a career or business that will reward you financially.