Two Tools for Financial Freedom

As the election draws near we hear more and more about how our economy is not what we hoped it would be.  Therefore most Americans must work hard to save their money and count their pennies.  However, most people either don't know where to start or don't want to put in the effort to properly keep track of their expenses.  The most common solution is to just make impulse decisions on whether they have the money or not.  Your bank account has more money in it so you decide you can spend.  Then your bank account doesn't have enough money so you decide you can't spend.  It doesn't take into account if you have an emergency down the road or if you need to save for the future.   This only compounds the issue and can result in a riptide of financial ineptitude.  We could all use a little extra education on budgeting.   There are two necessary tools to solve your financial woes.

The first strategy is to record everything you spend or receive in a notebook.  I mean everything.  You find a penny on the road and put it in your pocket, write it down.  You receive $1,000 from writing on, write it down.  You spend $50 on groceries, write it down.  You get the point.  It's not designed to be overly crazy and OCD about your finances.  The point is to set you free and relax about where things are going.  The first couple months in which you actually write down everything will be essential.  You'll probably have to go through the seven steps of grief, such as denial and emptiness, but it will alter the way you think about your spending habits in the long haul.  You won't have to worry about if your spending too much here or there because you'll know where your money is going.  Once you've written it down make sure to categorize the spending into large buckets such as food, transportation, home, rent/mortgage, etc.  Largely, this will give you the data you will need to set financial goals.  Review how well you've done in certain categories and list where you think you can make cuts or changes.  Find a way to estimate your income and expenses to see where you end up, whether it's positive or negative.  Obviously if it's negative then you'll need to make cuts the following month to get back to positive results (receiving more money than you are spending).  Lastly, make sure there is room in your budget each month to reach long-term goals.  If you'd like to have $200,000 at retirement, make sure you putting away $500-$700 a month.  If you'd like to take a long cruise in the Caribbean, make sure you are putting away $100 a month (or more if you'd like to leave sooner than later).  Just make sure you write down your goals and that you have the space in your budget to reach them.  Each month compare what you actually spent to your goals and analyze the results.  Don't get discouraged if you fail in your first few months.  Keep working hard at it and don't give up.  The results will come.

The second strategy is more forward-thinking than the first strategy.  It is helpful to write down all of your assets and all of your debts on one spreadsheet.  This would normally be called a net worth analysis.  Under assets you would record anything with tangible value that you own, such as a car, house, expensive jewelry, furniture, paintings, investments, bank accounts, etc.  The list does not have to be all-inclusive, but it should have anything of significant value (probably over $500-$1,000).  Next, you would list all of your debts.  This would include anything such as a loan to a friend or relative, student loans, car loans, mortgage, credit card bills, etc.  Again, it doesn't need to be $10 you gave to your co-worker for lunch.  It just needs to include everything significant.  Once you have both assets and debts listed, you should add them up.  The difference between the total assets and the total debts is your net worth.  The goal is to have this number be positive, but don't give up if it ends up as negative.  Every month or every six months continue this exercise and compare to how you were during the last time you completed it.  You'll want to continue to make your net worth grow and increase. 

You may start developing goals from your net worth analysis and then accomplishing them by applying them to your monthly budget.  These two tools should work together to help achieve financial freedom and help you breathe a little easier about your finances.  Please let me know if you have any questions about how to set up your worksheets or any other comments to encourage other readers.

Budget Example

Budget Worksheet