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Budget Planning And Your Financial Freedom
Budgeting and Cash Flow…..two simple phrases that you would expect to learn their meaning in elementary school. If not, certainly by high school. Well guess what…Neither nor!!! I suspect this is the main reason why so many young people get into financial trouble at such an early age. They have no idea how the whole process works. Have you heard the joke about the newlyweds arguing…one says “Why do we always run out of money before we run out of money”, the other retorts “We can’t be out of money, we have plenty of leftover checks!” It’s true that your financial freedom will be compromised without proper budgeting!
When you start preparing your budget, there is one basic principle you must keep in mind. That’s Honesty is the best policy. When you’re just starting out, you have to make some estimates. You have to be honest with yourself here. For example, if you’re trying to calculate how much you spend on food every day, don’t forget the daily stop at Java Palace on the way to work or the afternoon snack at the office canteen etc. etc. A good thinking out budget will keep you on track to achieve all the goals you’ve set. you have set. Plus, just writing down everything you’ll need when budgeting will help you uncover any black holes that are mysteriously eating into your paycheck, month after month. Once you’ve set your budget, honesty has to work again. You have to honestly try to stick to your budget or you will fail. This does not happen automatically. There will be certain parts of budgeting that you can put on auto pilot. This will help you in your quest to achieve financial freedom.
So where and how does the budget begin to be drawn up. Since I wasn’t even taught this in school, it was a pretty serendipitous encounter that started me on the path to never bouncing a check or never getting a collection phone call. Many years ago, when I was applying for a new car loan, the bank prepared some loan documents for me to fill out. One of them was the personal financial statement (PFS). That’s when I filled it out, and since then I’ve filled one out every year. I think it is the best tool for learning budgeting. If you have never seen one, go to your local bank branch and ask for a PFS. If they ask why, just say you’re getting ready to apply for a mortgage. Anyway, I didn’t get it from the bank for a long time because it’s very easy to make your own PFS. In short, here’s what you do. Take a blank piece of paper and draw a line down the middle. At the top of the left side, label INCOME, and at the top of the right side, EXPENDITURE. Now the fun begins. Back to the left side…write down all your sources of monthly after tax income. This is important because you can’t pay bills with pre-tax income, meaning your gross salary has no value for this exercise. Also note that if you’re getting paid weekly, take the after-tax number and multiply it by 52 and divide by 12 to get a real after-tax monthly number that’s higher than just multiplying your weekly number by four thanks to that extra week sneaking in once a quarter. When you’re done, add up the left side to get your total monthly income to work your magic on. Now move to the right side. Start by listing all of your monthly expenses that are fixed, meaning they are the same every single month like your home mortgage and your car and your utility bill if you have a balanced charge, which by the way, if you don’t have a balanced charge, you should take into account as it will help you stay on track. Once you’re done listing all of your fixed monthly expenses, start listing all of your variable monthly expenses. Some judgment may come into play here. Do your best to guess and don’t miss anything. Don’t forget birthday gifts, entertainment, bowling night, newspapers and a daily Java station if it suits you. Finally, put it in the miscellaneous category, because you know you’ll need it. Add the right side. Is the number greater or less than the left side? If it’s smaller than the one on the left, you’re in good shape for budgeting. If it is smaller than the left side, you have work to do if you want to succeed with financial freedom.
If the above answer was yes, or in other words, you spend less than you bring home, then congratulations. You are in good company and on your way to financial freedom. You probably have some good habits instilled in you from your upbringing or from some other source of financial knowledge and experience. Let me ask you one question. When you listed all your expenses on the right side, did you make an entry for yourself? Have you included an entry called savings? Do you put any monthly income into a 401(k), IRA, or fund any type of retirement planning? I assume you are dealing with this most important aspect of your finances. Another question. You included credit card debt, right? Is that number increasing, decreasing or staying the same? Again, if you’re in this camp, I assume all is well on this front.
If the answer above is no, then you might be related to the couple we talked about at the beginning who run out of money every month before they run out of money! What to do? In one word…DISCIPLINE! It takes discipline to get your finances in order. One of the reasons your number is negative is because you were honest enough to write down ALL of your expenses and that’s a good thing. However, your day of reckoning has arrived. Now you need to start doing some inner reflection. You have to ask yourself “Of all those things on the cost side… do I really need all those things?” Is a 5 month magazine subscription really necessary? Is it so important to go out to eat once a week? How about once a month! If you made just that one change, not only would your budgeting look better, but when you actually do go out, it would mean a lot more. Believe it or not, it will bring you more satisfaction than the “weekly grind” of going to a restaurant. If you don’t like the word discipline, then I’ll throw another word at you… TUNING. It’s time to start grooming the right side of the sheet. Look carefully at each entry, line by line, to determine where to tweak. This is the only way to make the right side fall according to your resources. Of course, you can make the left side bigger, but that’s easier said than done.
Now that you have a general idea of how to start budgeting, we need to turn our attention to fine-tuning the right-hand side of the equation because at the beginning, that’s where you have the most control. For now, the left side is out of your control. Sure, you can work more hours or find another job or start a side business, all of which will increase the income side of the equation, but as we just mentioned, that’s easier said than done. Get this part of the budget right and your financial freedom will become a reality before too much time!
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