Attaining Financial Freedom Part 3 – Budgeting
As we continue in the Financial Freedom series, we will look at a very important tool that can help you attain financial freedom – budgeting. A budget shows the inflow and outflow of money for a person, business, or organization. It shows the health of one’s finances and it can help you plan.
A budget contains both your income and expenses. Income is how much you make, including paycheck, profits from businesses, child support and annuity from insurance. Expenses, on the other hand, are the items you spend your money on, like bills and food. For most people, money comes at regular intervals while other people like freelancers or self-employed people may make money at irregular intervals. How often you earn income determines how often you should budget and how your money should be allocated. Generally, people with regular income should budget every month. If your income and expenses are fixed, you can reuse the same budget month after month. Even then, you should still look at your budget at least once a month so that any surprises can easily be caught. On the other hand, if your income and/or expenses are not fixed, you may want to make your budget span between the current income and the expected time of your next income. In this case, there is a need to regularly review the budget, especially if there is a change in expectation.
The primary goal of a budget is to ensure you spend less than you earn so you can save more, but it also has the following benefits:
It can tell you if you are generally living above your means
It lets you know what items you spend most of your income on
It tells you if you are overspending on an item or set of items
It helps you identify billing errors if a bill is higher than usual or expected
To create a budget, write down all your income amount and add them together. Do the same for your expenses. Expenses should include bills (like mortgage or rent, loan repayments and utilities) and other expenses like transportation, food, day care (if applicable). You may want to look at your bank and credit card statements for the last few months to ensure no item is left out. Subtract the total of your expenses from your total income. This gives you the net cashflow. If the net is positive, otherwise known as surplus budget, you make more money than you spend, and you can afford to save. On the other hand, if the net is negative (deficit), you are spending more than you earn, and you may end up missing some necessary payments, dip into your savings or borrowing to afford your lifestyle.
Budget may be as simple as an Excel or Google Spreadsheet. Some banks also have budgeting tools. These can automatically track your expenses, and they let you assign items to different categories like transportation, medical expenses, credit card payments and so on. In addition, there are many online and mobile budgeting apps you can download on your phones and other mobile devices. Before selecting a tool, check the reviews online, and make sure it is secure, especially if you must link it to your bank or credit card account.
Budgets need to be managed at regular intervals when your income or expenditure changes. A quarterly review of the budget is recommended but when that is not feasible, budget review must be done at least yearly, preferably at the beginning or end of the year. This will give you control over your finances and afford you the opportunity to live a financially free life.