Budgeting has long been hailed as a key to successful personal financial management, and rightfully so. Those who actively budget their income each month tend to make smarter financial decisions. In this article, we are going to discuss why a budget is an essential part of achieving true financial freedom, and how to practically establish one.
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Keeping a budget is not easy. It requires discipline and persistence, and if a person is not easily amused by numbers and detail, then committing to consistently tracking a budget can be quite a foreboding task. That is why it is very important that a person first understand why it is essential to keep a budget.
It’s easy to write out financial goals. It’s easy to say, “I want to have $50,000 saved up in 3 years.” The difficult part is walking out the process to achieve the goal, and that is where the power of budgeting comes in. First of all, let’s use a metaphorical example, and let’s assume that you are going to travel to Florida for vacation.
Therefore, you pull out the Atlas, and you bring out the map of the United States. You look in Florida, and you find Orlando, which is going to be your vacation destination. How do you get to Orlando? Actually, let’s rephrase that question. What’s the first thing you need to do in order to find out how to get to Orlando? Well, the answer is…you need to know where you are currently located. And that is the power of budgeting.
If you have a financial goal of saving up $50,000 in 3 years, or saving a certain amount of money for retirement, you cannot make real headway toward that goal unless you know where you currently are, and budgeting is the financial equivalent of “finding out where you really are.” Furthermore, once you begin budgeting and identify where you are, your ongoing monthly budgeting will also keep you on the path toward your ultimate financial goal.
How Do We Do It?
Setting up a budget is easy. When broken down into its most basic elements, budgeting simply consists of tracking two things: income and expenses. A simple way to establish a basic monthly budget is to follow these steps: (fill out in monthly figures)
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List out all of your fixed expenses – mortgage, car payment, debt payment, cable, internet, etc
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List out all of your variable expenses – these are things you have to buy every month, but the amount can vary (gas, food, etc)
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List out your income
Now once you finish these three steps, add up the figures from step 1 and step 2. The total must be lower than step 3. If it is not, that means you are in the negative each month, and that is dangerous. In that case, serious lifestyle changes must be considered. However, assuming that steps 1 and 2 equal less than step 3, you now know how much net income you have each month. Once you have your budget established, you can look into diversifieng your portfolio with some investments like stock trading or forex trading. Keep in mind, these markets carry a significant amount of risk, and should not be a part of your initial savings plan.
Now, you can begin to budget what you will do with that net income. True financial freedom consists of being free from all bad debts including credit cards and other revolving debt. Thus, the first thing you may want to do with extra net income is to simply funnel that cash toward paying down bad debts. This will not be enjoyable in the near term, but in the long term it will lead to great gains, both financially and emotionally.
