Budgeting is a crucial first step in gaining financial freedom. It’s also something everyone is expected to know, yet most of us have to go out of our way to learn. Even when you find the information, it will lack the most important rule of budgeting: it’s about moderation and not deprivation.
Like anything in life, you’ll need to indulge a little here and there. Unless you’re a robot (in which case, you probably don’t need this guide), you’ll need cheat meals, vacation days, and drinks with your friends. However, it is not sustainable to live in the fun zone 24/7. So in creating your budget, keep this in mind and follow the next steps. Note: you can do some of these out of sequence, but I found this to be the best way for my personal situation.
Income (know where your money is coming from and how much):
This should be obvious, but it’s easy to lose track of as you go through the motions. Are you working? Are you a student? Are you on disability? Do you have investments? These factors should help you determine your considerations for allocating your expenses. Go through your bank statements and determine the post-tax amount of income you make, ideally on a monthly basis. Add all of it up for a total, but make sure to categorize each form of income.
Expenses (know where your money is going and how much):
Just like previous step, go through your statements and figure out where you’re putting your money, add it all up, and make sure to categorize them into the following:
Bills (generally fixed expenses such as rent, mortgage, utilities, cellphone, etc.)
Debt (definitely a nasty, uncomfortable topic, but know how much debt you have and how much you’re putting forward to pay it off)
Groceries (variable expenses that may fluctuate but should stay within a certain range)
Entertainment (anything non-essential to your survival, such as movies, subscription services, eating out with friends, gourmet coffee, drinks, etc.)
Subtract your expenses from your income:
Fairly self-explanatory, but leaving nothing to chance, I want you to be sure to subtract the money you're spending from the money you’re making. If you’re living within your means, the value should be greater than zero. If the value is negative, you’re in trouble.
Set your goals:
You'll need a clear picture of what you want to accomplish, and to simplify it for you I will set your first goal: save up at least six months worth of your essential expenses (anything you need to survive in the event you lose your source of income). Saving this much will definitely take time if you haven’t started doing so, but keep in mind fast money goes fast. You’ll have a greater appreciation for slow money you set aside than you will getting $100 from your grandma for Christmas. In setting your goals, always write them down. I cannot stress this enough. Put your hand to paper and write down your financial goals. There’s a lot of science to back up the efficacy of recording your goals on paper.
Reassess your expenses:
I’ll be straight with you, you are going to do this a lot throughout your life, so buckle in. We will go through each expense category and figure out where you can trim some fat.
Bills: No one likes bills, so you can always start there and see if you’re paying too much for anything. Check your cell phone usage and consider reducing your data plan, or check your auto insurance and try to negotiate a better rate. Even look at rates between certain services, such as waste management.
Debt: Figure out which forms of debt are the most expensive for you and prioritize those first. Consider consolidating other debts under a lower interest rate to save yourself some money in the long-term.
Groceries: Look at what you’re buying from the grocery store. Do you need those marshmallows, cigarettes, and two-liter bottles of soda? I’d wager you probably don’t. Whole foods tend to be less expensive than processed goods, so this has the added benefit of fixing your eating habits. Another good strategy is to see what you throw away the most from your fridge and pantry and avoid buying those to save a few bucks here and there. Also consider the price difference between organic and regular foods. If you must buy organic foods, then don’t worry about cutting them out.
Entertainment: Here’s where you’re likely going to make the most adjustments, just remember that we are moderating your entertainment expenses and not depriving yourself of entertainment. You’ll go crazy like you’re living in a padded room. First, I want you to go through how much money you spend on eating out. This tends to be a huge expense for most people as it is more convenient than cooking at home.
For example, let’s say you’re eating at Panda Express three times a week and you get the two entree plate for about $12 after tax. That’s $36 a week, $144 a month, and $1,728 a year on Panda Express alone. Let’s say you also buy a venti mocha frappuccino from Starbucks every day (and people do) for about $6 after taxes. If you don’t tip the hardworking baristas or order one of their delicious freeze-dried breakfast sandwiches, you’re paying $42 a week, $168 a month, and $2,016 a year. That, plus the Panda, is $3,744, equivalent to getting about a $1.80 per hour raise on your paycheck.
Everyone loves to drink with their friends, but doing it every night isn’t sustainable, physically, emotionally, or financially. According to EventBrite, people typically spend about $80 on a night out. If you’re doing this three times a week (a conservative estimate for many veterans), that’s $240 per week, $960 per month, and $11,520 per year. That’s a pretty staggering number when you look at it added up.
Finally, take a look at your monthly subscriptions. Most people pay for services like Netflix and Hulu, and for the most part these expenses are necessary to maintain your sanity after a long week of excessive brain activity. My recommendation is find the subscriptions you’re not using and turn them off to save a couple hundred bucks throughout the year. For example, in recent times before writing this guide, I had various subscriptions to streaming services I didn’t use, and although $40 a month isn’t a life-changing per month saving, it’s still money I can be using for something else more productive. I also turned off Hulu because Netflix is superior. Fight me.
Remember: don’t totally cut yourself off from having a good time. It’s like diving into a spinach only diet, and you’ll probably binge-eat donuts not long after starting.
Create a timeline for your goals:
Now that you have an idea of what you can cut out, you can create a timeline for your financial goals. Remember not to allot too much of your income to those goals.
Initially set aside at least 10% of your income to save. Think of it as paying yourself first, or a “Me Tax” as some call it. Depending on how comfortable you are, you can adjust this up, but if the “Me Tax” amount is too high, then you run the risk of not being able to pay your bills or will have to pull money out for other expenses. Then you’ll be back where you started.
Live below, not within, your means. Just because you can now afford that gold-plated, diamond-encrusted mobile phone with Kim Kardashian on speed dial doesn’t mean you should actually buy it. Besides, if you could, you wouldn’t need this guide or maybe you really need this guide. Owning expensive things does not make you wealthy. It’s like thinking your one SoundCloud follower makes you a celebrity. At any rate, the goal here is to keep your expenditures as steady and low as possible while your personal wealth and spending power grows. This will ensure your wealth grows quickly and that you’ll reach your goals faster.
You’re always going to need to check up on things. Make a habit of tracking where your money is going, at least once a month, to keep yourself on the straight and narrow. Just like your own physical fitness, you want to monitor your results and see where you’re falling short. Don’t get complacent and think everything is on autopilot because that’s when your plan will likely start to fall apart.
Remember: you are going to fail, probably more than once. We, as humans, have a tendency to give up on our goals once we trip over a hurdle and hit our faces on the ground. It’s a natural inclination, but one that must be fought at all costs. The most successful people are not characterized by their successes, but by their ability to quickly overcome their failures. You will reach your goals, and periodically falling is just another step on the journey.
Congratulations, you’ve just taken your first major step in achieving financial freedom.
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