In the “check up from the neck up” section, I introduced the concept of the scale. Another concept to help you manage your money is “the box”. Imagine a box. It represents your income, how much money you make. Your expenses, or what you spend your money on, are what you put into the box. It’s vital that you don’t overfill your box because that means you are spending more than you are making. When you spend more than you make, that creates debt and debt takes a long time and is very expensive to pay off.
For example, if you have $5,000 in credit card debt and you only pay the minimum payment each month, you’ll pay more than $37,000 over 50 years, just to pay off the $5,000. This example assumes you do not spend any more on your credit card and your 21% APR does not rise. This minimum payment is 2% of your debt. As this example shows, living beyond your means is not sustainable and eventually your financial situation will collapse.
How do you prevent yourself from spending more than you make? You budget. What is a budget? A budget is a spending plan where you compare your income, or the money you make, with your expenses, or the things you spend your money on. A monthly budget is the most practically because that’s how bills tend to cycle, but we also recommend making a yearly budget to see how much you spend on certain items over the course of a year. We’ll get to that.
Why do we budget? You budget so you don’t spend more than you make and create costly debt. You also budget so you spend your hard earned money where you want to spend it. It takes you from chaos to control. A lot of people use their account balance as their budget, spending freely until it approaches zero. There’s no control in that approach. With a budget, you can decide where you want to spend your money.