In order to achieve financial freedom, you need to have a good track of all your expenses, learn to spend less and save more.
If you have read my previous post: 5-Steps On How To Retire In 5 Years, then you probably want to create and manage your personal budget as the first step to your financial independence.
We know that financial freedom doesn’t come itself automatically. It requires hard work and you really have to strive for it if your account is at $0 savings.
Since 85% of people around the world hate their job, I assume that same or maybe higher are striving to this ultimate goal: financial independence and freedom.
Money isn’t really everything. But frankly speaking, we need money to buy yourself freedom. Freedom from the bondage of hard labor every day called the modern slavery of our time – the 9-5 job. Freedom to do what you’re passionate about against bargaining your time for money.
Wait! Don’t get me wrong, there’s nothing wrong with a 9-5 day job as long as you enjoy it and you love your job. But, if you hate your job, then it’s a big problem to wake up every day and force yourself to work those long hours every single day.
So, let’s get started in constructing your personal budget.
What Is A Budget?
A budget is an estimate of all financial flows over a period of time, which means your cash in and cash out, for example in a year or a month. It’s basically a plan to money your money so you have a better idea about where you spend your money, to whom you owe money and how much.
Step 1. Note Your Net Income
Your net income is your cash inflow so you need to know how much you earn, let’s say in a month. Keep in mind that in calculating your budget, the paycheck amount is the number you need.
It’s easy to overestimate how much you can afford if you base your budget on how much you earn per hour since you also have to pay taxes, social securities, pension etc.
Step 2. Track your Expenses
Tracking your expenses is the most important thing in creating a budget. If you don’t track and trace all your expenses, you will definitely end up spending more than you can afford with respect to your net income.
It’s always a good idea to keep track of and categorize your expenses, so you know where you can make adjustments later on. This you also help to identify what you are spending the most money on and where it might be easiest to cut back.
Start by listing all your expenses dollar by dollar. Then you can start categorizing into 2 major categories: Fixed and Variable Expenses.
The fixed expenses are the expenses that are required for living. And you can’t do something about them in the short run. They are like permanent expenses.
The variable expenses are the expenses that are under your control. This means you can make adjustments with them if necessary.
This is how your worksheet should look like:
- Net Income:
- Fixed Expenses:
- Rent or mortgage
- Property tax
- Strata/condo fee
- Utility bills (cable, cell, electricity, water, etc.)
- Lease / car loan payment
- Vehicle insurance (if paying monthly)
- Life / Disability / Extended health (or other) insurance
- Bank fees
- Debt payments for your debt repayment plan
- Variable Expenses:
- Property taxes (if paying quarterly or annually)
- House insurance (if paying annually)
- Vehicle insurance (if paying quarterly or annually)
- Clothing & shoes (if you shop once or twice per year)
- Health expenses
- Vet bills if you have pets
- Vehicle maintenance
- Personal care items (drugstore)
- Fuel / public transportation costs
- Work lunches & snacks
- Eating out
- Sports & recreation, other hobbies
- Hair care/salon services
- Magazines / newspapers / books
- Children’s lessons and activities
- Balance (+/-)
Step 3: Financial Goal
After listing all your expenses, you will get an idea whether or not you’re spending more than your paycheck. Unfortunately, there are almost 80% of Americans you are living a paycheck to paycheck lifestyle. And If you are inside this statistic then you better make a financial goal so you can get out of the financial situation immediately.
In this step, you need to identify your money goal. In this post, I assume that our ultimate goal is to achieve financial freedom as soon as possible.
Maybe you want to retire extremely early or you want to achieve financial independence and retire in five years, or maybe in 10 or 15 years.
Then you need to focus on that goal.
Step 4: Creating a Financial Plan
This is the most exciting part. OR maybe not.
After identifying your financial goal – whether it’s the ultimate goal of financial freedom or small goals like getting out from your huge debts, now you need to create a plan on how you can achieve it.
Let’s stick to the plan of achieving financial freedom.
Now, the only person who knows your real financial situation is you. Then, you know IF financial freedom is realistic for you to achieve in 5 years, like in the concept of 80:20 ratio what I was talking about in my previous post.
Using this 80:20 ratio is honestly extremely difficult if you don’t have a stable income to cover your expenses. Likewise, even if you have a stable income at a minimum wage, if you have huge total FIXED expenses, then you need you a different ratio.
Take a look at your budget worksheet. What is the ration of your net income contra your total expenses? If you read my post the other day, it is saddening to find out the people who live paycheck to paycheck have a less than $800 to cover them before the next paycheck.
So, what I’m trying to say is that you need to be realistic with your plans so that you can achieve your financial goal on the set time.
Step 5: Adjustments
You know that if you need to accomplish something big on your personal finances, then you need to do a lot of adjustments in your budget.
So, if you’re budget ratio shows at 10:90 after tracking all your expenses, then you know you need to make a lot of adjustments if you want to achieve financial freedom in 5 years.
You can adjust your ratio like 60:40 or anything that can fit your lifestyle. This means that you need to save much more money and you need to spend much lesser.
As I mentioned in my earlier post, I don’t follow that extreme minimalist lifestyle of only $650 a month lifestyle. There’s nothing wrong with that. But I love giving. I love to give gifts to my family – to my husband and daughters- even without any occasion. I love to do the things I love without thinking so much about money.
So what I did was, I chose the traditional way of increasing sources of income to achieve financial freedom. I worked 3 jobs and had 2 businesses at the same time. I slept very few hours. Then just after 3 years, I became complete financial independence.
Whether you choose to live the minimalist lifestyle or the graveyard work for a couple of years, it doesn’t matter – as long as you will achieve financial independence and you never have to worry about running out of money again.
Step 6: Budget Maintenance
Keep tracking your expenses every single month and compare them with the previous months. This way, you can see if you spend the money than your allotted budget.
Most of the banks have their own budget app and you may consider using the one from your own bank. I mean where all your bank accounts are. This easily enables you to import data from your bank statements and categorize them as you wish.
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This is the end of my topic today “6 Steps In Creating A Personal Budget Towards Your Financial Freedom“. I hope this post will help you to improve your personal finances.
If you have any thought or question, please don’t hesitate to leave a comment below. Good luck with your journey to financial freedom online. God bless!