10 DAY CHALLENGE
Starting point. Basic strategy meant for those starting near rock bottom.
DAY 7 - BUDGETING
I'll spare you the standard budgeting template. Instead we'll explore how to craft a budget inspired by the teachings of Robert Kiyosaki's "Rich Dad, Poor Dad," focusing on building wealth, managing cash flow, and achieving financial freedom.
Core Rich Dad Principles Relevant to Budgeting
Before getting into the budgeting process, it’s essential to understand the foundational concepts that influence financial decision-making:
Assets vs. Liabilities: Understand the difference between assets (things that put money in your pocket, like investments or rental properties) and liabilities (things that take money out, like car loans or credit card debt).
Make Money Work for You: Instead of working solely for money, focus on creating income-generating assets to achieve financial independence.
Mindset Shift: Financial education and a proactive mindset are critical to managing money effectively.
Pay Yourself First: Prioritize saving and investing before paying bills. Spending on non-essentials last.
Cash Flow Management: Wealth is built by controlling and increasing cash flow, not just by earning a high income.
These principles serve as the backbone of the strategy, which differs significantly from traditional budgeting methods that focus solely on cutting expenses.
A structured approach to budgeting:
1. Assess Your Current Financial Situation
Objective: Understand your income, expenses, assets, and liabilities.
Action:
List all sources of income (e.g., salary, side hustles, passive income).
Categorize your expenses into necessities (e.g., rent, utilities), discretionary spending (e.g., dining out), and liabilities (e.g., loan payments).
Identify your assets (e.g., savings, investments, real estate) and liabilities (e.g., credit card debt, mortgage).
This step aligns with the principle of financial education. Knowing where your money goes is the first step to controlling it.
2. Adopt the "Pay Yourself First" Rule
Objective: Prioritize building wealth over paying bills or spending on wants.
Action:
Allocate a percentage of your income (e.g., 10-20%) to savings and investments before anything else.
Automate transfers to investment accounts, such as a retirement fund, stock portfolio, or real estate investment trust (REIT).
Paying yourself first ensures that you’re consistently building assets, which is the key to financial independence. Rich Dad advises treating this as a non-negotiable expense, even if it means adjusting other spending.
3. Focus on Building Assets
Objective: Shift your budget toward acquiring income-generating assets.
Action:
Allocate funds to investments like stocks, mutual funds, or real estate.
Consider low-cost index funds or dividend-paying stocks to start building passive income.
Explore opportunities for side hustles or small business ventures that can grow into assets over time.
The rich get richer because they invest in assets that generate cash flow. Your budget should reflect this priority rather than focusing solely on reducing expenses.
4. Minimize Liabilities
Objective: Reduce or eliminate expenses that drain your wealth.
Action:
Pay off high-interest debt (e.g., credit cards) as quickly as possible.
Avoid taking on new liabilities, such as unnecessary loans or financing for depreciating items like luxury cars.
If you have a mortgage, consider strategies to pay it off early or ensure it’s tied to an income-producing asset (e.g., a rental property).
Liabilities keep you trapped in the "rat race." A successful budget minimizes these to free up cash flow for asset-building.
5. Control Living Expenses
Objective: Live well below your means to maximize funds available for assets.
Action:
Differentiate between needs and wants. Spend on necessities but cut back on discretionary items like entertainment or luxury goods.
Negotiate bills (e.g., insurance, utilities) or find cheaper alternatives.
Avoid lifestyle inflation—don’t increase spending as your income grows.
6. Build an Emergency Fund
Objective: Protect your financial plan from unexpected setbacks.
Action:
Save 3-6 months’ worth of living expenses in a liquid, accessible account (e.g., high-yield savings).
Use this fund only for emergencies, not for discretionary spending or investments.
7. Review and Adjust Regularly
Objective: Ensure your budget evolves with your financial goals and circumstances.
Action:
Review your budget monthly to track progress and adjust allocations as needed.
Reassess your assets and liabilities to ensure you’re moving toward financial independence.
Increase your investment contributions as your income grows.
Financial education is an ongoing process. Regularly refining your budget keeps you aligned with your wealth-building goals.
Practical Tips for Success
Educate Yourself: Read books, attend seminars, or take courses on investing and financial management.
Start Small: Even small investments (e.g., $50/month in a mutual fund) can grow over time.
Seek Mentors: Learn from those who have achieved financial success, as Kiyosaki did with his "Rich Dad."
Take Calculated Risks: Don’t shy away from opportunities that could generate passive income, but research thoroughly.
Stay Disciplined: Stick to your budget and avoid impulsive spending on liabilities.
It all boils down to two categories
Money you spend
Money you keep (This represents freedom)
10 day challenge