Free From Money

This post is part of the Financial Basics series.

To be Free From Money you must be in control of your money

The first step on the road to financial freedom is taking a look at your spending versus your income. If you are spending more than you make, you will be a slave to debt for the rest of your life. Most people hate the word budget, so I’ll use the term “spending plan” instead.

The first step to creating a realistic spending plan is to know where your money is going. Start tracking your expenses for a month or two. Make a list of everything you spend your money on, and then sum up each category for any given month. Spreadsheets are a very useful tool for for tracking spending and then summing up the total. You will probably want to use a few general categories, like groceries or gas for the car. I think it’s a good idea to create a separate category for non-essential spending like dining out so you can start to see how expensive these habits can be. Make a list of your average utility bills like water, electricity, and gas. Find out the MINIMUM payments due on each of your debts and list those individually. Also be sure to think about your average entertainment expenses. If you go clothes shopping every weekend, include it in the budget spending plan. Like to play golf on the weekends? Make sure you figure out the average cost, including green fees, lunches, or the cost to practice at the driving range. Keep going through your spending to get an idea of where your money goes and create whatever groups you need for your spending plan. When you are just starting out this should be a monthly routine until you refine your spending plan to the point of automation.

Now, sum up everything you spend money on, and compare it to your after-tax income. You’re going to fall into one of two camps: either your income is greater than your expenses, or your expenses are greater than your income.

I hope that your spending is less than what you earn. If it’s not, you need to start evaluating your spending habits and think about where you can cut expenses. Play golf once a month instead of once a week. Shop less. Skip the manicure and pedicure every month, or learn to do it at home. Cancel the cable bill. There are numerous resources on the internet to get ideas for cutting expenses, so I won’t go over other ideas in depth here. But reducing the amount of money you spend is the number one thing you must learn to do if you are going to be successful in creating wealth.

Hopefully your spending plan tells you that you are making more money than you spend. If you are at this point, then you are starting on the right foot. Subtract your spending from your after-tax income to get the extra money you have each month. This amount will be the key to financial independence. This is the amount you will use to start your emergency fund. This will be the amount you use to payoff each of your debts one by one. This will be the money you save for yourself to become free from money. If you can, take a look at your spending and see where you can make cuts. The larger the gap between your spending and income the more you will have to keep for yourself and the better off you will be.

Creating a spending plan is not a one-time thing that you do in the beginning and forget about. It will take continuous refinement as you start to get a grip on where your money goes every month. Every time you pay off a debt you will take the minimum payment out of the plan and add it to the free amount. This free amount will in turn grow larger, allowing you to pay off other debts quicker or reach savings goals faster. You also need to remember to follow your spending plan! Of course this sounds obvious, but so many people who create a plan never actually follow it. And whatever you do, please do not fall into the trap of putting “just one thing” on your credit card every month. You might be surprised at how often you actually put stuff on every month. I stopped using credit cards altogether for just this reason, but you may prefer to keep one around for peace of mind only.

So I encourage you to start keeping tabs on where your money goes. It will be an enlightening experience I’m sure, even if you think you know exactly how much you spend every month. Good luck!