Budgeting and Planning: Why Is It So Important?

This article is an excerpt from the Shortform book guide to "The Millionaire Next Door" by Thomas J. Stanley and William D. Danko. Shortform has the world's best summaries and analyses of books you should be reading.

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Why is budgeting and planning important? Can financial planning and budgeting help you build wealth?

Budgeting and planning is important because it helps you accurately set goals, track your spending, and plan your investments. Budgeting and planning ensures the funds you need for wealth-building investments are available when you need them.

Read on to learn more about the importance of budgeting and planning.

The Importance of Budgeting and Planning

Controlling spending and building wealth requires budgeting and planning. Under-accumulators ignore financial planning and budgeting, and allow their income to determine their budget. If they want more, they use credit, thereby spending tomorrow’s money today.

In contrast, many millionaires are experts at budgeting and planning. While you might think millionaires don’t need to budget, the fact is, they become wealthy and remain that way because of financial planning and budgeting. It’s like jogging: most joggers don’t look like people who need to jog—they’re physically fit because disciplining themselves to jog regularly is how they got fit and stay fit.

To become wealthy and stay wealthy requires the following financial fitness steps:

1) Create and live by monthly and annual budgets. More than half of all millionaires say they budget. They’re motivated by visualizing the long-term rewards of achieving financial independence and being able to retire.

2) Know what your family spends annually for basic needs (food, clothing, and shelter). Fully 62% of the millionaires surveyed knew their monthly expenses, compared to 35% of high-income non-millionaires. A majority of the non-millionaires had no idea how much their consumer-oriented lifestyles cost them.

Credit cards are often a factor contributing to overspending. Most wealthy households have only a few credit cards, such as MasterCard and Visa, and a card for a department store chain like Sears or JCPenney. Millionaire households in the survey were four times more likely to have a Sears card than a Brooks Brothers card; only 6% of millionaires have an American Express Platinum card. Some high-income under-accumulators have a dozen or more credit cards, especially of status retailers.

3) Set specific daily, monthly, yearly, and life goals. Most millionaires are goal-oriented and take a long-term view. Their goals are not spending and acquiring material possessions, but being able to retire, be financially secure, and enjoy life. People who are financially secure are happier than those in their age/income category who aren’t. Unlike those living paycheck to paycheck, they don’t worry about the next economic slump.

4) Spend time planning your financial future. The number of millionaires who spend time planning investments is more than double the number who don’t plan. Many of those who said they don’t plan are high-income under-accumulators. PAWs spend significant time planning and managing investments. They leverage their knowledge by investing in areas where they have expertise—for instance, an auctioneer who specializes in commercial real estate might invest in that area. They hire qualified financial advisors, but they also do their own research.

The Short-Term Thinking of High-Income Spendthrifts 

The goal of many high-income under-accumulators is to be “better off” than their parents. This means having a larger home, driving luxury cars, acquiring all the status symbols, and sending the children to private schools.

Their focus is spending and appearing to be wealthy in the present, not accumulating wealth for the future. They work hard and spend what they earn to prove themselves and combat feelings of social inferiority, but they’re more stressed than happy. 

Despite striving to be better off than their parents, these under-accumulators share their parents’ view of money: spend it when you have it. Their parents spent it on momentary pleasures such as unhealthy food, alcohol, and smoking. They believed that the purpose of earning money was to spend it—never to save or invest it. If they wanted more, they found a way to earn more.

High-income spendthrifts and their parents often believe they don’t have enough money to invest. Yet many people spend vast amounts of money over a lifetime on wasteful habits, such as smoking several packs of cigarettes a day. 

When you add up what seem like small daily expenses, they become huge expenses.

Similarly, small amounts of money invested over time grow into significant financial assets.

Smokers would be better off kicking the habit and investing the cost of three packs a day in tobacco company stock. Investing the amount spent on a 40-year smoking habit would eventually create a portfolio worth millions. 

If they embrace budgeting and planning, many high-income under-accumulators of wealth who never learned from their parents to be frugal and invest could become millionaires. Like kicking the smoking habit, they have to be serious about changing their spending habits. In addition, they need the assistance of a professional accountant or financial planner who can help them create a budget and follow it.

Budgeting and Planning: Essential for Wealth

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Joseph Adebisi

Joseph has had a lifelong obsession with reading and acquiring new knowledge. He reads and writes for a living, and reads some more when he is supposedly taking a break from work. The first literature he read as a kid were Shakespeare's plays. Not surprisingly, he barely understood any of it. His favorite fiction authors are Tom Clancy, Ted Bell, and John Grisham. His preferred non-fiction genres are history, philosophy, business & economics, and instructional guides.

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