My 1st Million At 33

I started a Roth IRA a few years ago.  After a year or so, I stopped my contributions because of my tiny income.  I finally got a good job and I was ready to contribute money again.  I dialed mutual fund company Vanguard.  A customer service person answered.  The conversation went something like this:

Vanguard:  How can I help you today?
Me:  I would like to setup monthly contributions into my Roth IRA please.
Vanguard:  Certainly.  How much do you want to put in each month?
Me (after 10 seconds of silence): Um.  I need to call you back.

I had no idea what to say.  The following is exactly what went through my head in that 10 seconds of silence:

I wonder how much my utility bills are going to be?  When do I start paying off my student loans?  What’s the minimum?  What’s in my checking account now?  Don’t I have money in my savings account too?  How much money do I make per month?  How much taxes are taken out?  How much do I need to save for a down payment for a house next year?  Oh shoot!  I spent a lot on my credit card this month didn’t I?  Man, I wish I didn’t buy that heart rate monitor.  How many months are left for IRA contributions this year?  How much wood could a woodchuck chuck if a woodchuck could chuck wood?  This sucks.

I had not planned or budgeted my money.  There are plenty of reasons why we should budget but here are the 4 top benefits that I have personally experienced:

1)  You feel less guilty.

David Allen, author of “Getting Things Done“, says that as long as your time is being spent how you think you should be spending it, you won’t feel guilty.  He was talking about time management but the same twist holds true with money.  As long as your money is going where you think it should go, you’ll feel good about your finances.  A dead giveaway that you’re about to make a guilty purchase?  You think to yourself:  “Eh. Maybe I shouldn’t. I need to save money.”

2) You curb spending.

You’ve budgeted $400 for spending each month.  It’s the 10th and you’ve already spent $350 to get that new iPod.  If you want to buy something else this month, your brain will say, “Whoa there.  You’re close to spending all of money this month already.  Do you really need that luxury toilet paper?”  Didn’t think so.

3)  You do LESS number crunching.

Yes.  I actually do less number crunching.  Remember that 10-second internal monologue I had when the Vanguard person asked me how much money I wanted to contribute each month?  We go through a variation of this monologue every time we’re about to spend money on anything.  We do huge calculations in our heads every time a dollar leaves our pockets.  If you keep a budget, the thought process and math becomes simple:  “Will buying this put me over what I’ve budgeted?  If yes, don’t buy.  If no, you can buy.”

4)  You spend less than you earn.

Budgeting rule #1 is that you don’t allocate more than you make.  A budget system that violates this rule will not work in the long run.  Even if you have a cushion of money in the bank, it can eventually run out.  The general rule for building wealth, getting out of debt, saving for a house, and being an overall cool cat is:  “Spend less than you earn”.  Budgeting helps you do this.

Next week:  Effective Budgeting:  Building Strategies (Part 2 of 3)

—
Henry, who contributes to the blog Binary Dollar, is a developing writer interested in technology and fundamental personal finance.