The Way to Financial FreedomAccording to a Federal Reserve report, America’s personal debt stood at a staggering $2.6 billion in April 2008. Both revolving credits – the credit card debt and the fixed-payment loans – are on a rise. The total debt increased by $8.9 billion on a monthly basis as on April 2008. These figures clearly indicate that Americans are in dire need of planning their finances.
Financial planning isn’t rocket science. All you need to do is get your finances and, more importantly, your lifestyle organized. Some simple yet effective steps and you’ll be on your way to achieving complete financial freedom. The steps mentioned here aren’t necessarily meant for those who are in deep in debt. If you manage your finances well you may never get into trouble.
Step 1: BudgetYou will find a number of books and fancy software in the market to help you create a budget for your expenses. However, all you really need is a notebook and a pencil. According to Wikipedia, the online encyclopedia, “Budget generally refers to a list of all planned expenses and revenues.” Simply put, a budget means planning your expenses before you incur them. Essentially creating a budget lets you control your money rather letting your money control you.
So how do you create a budget? There are two parts in a budget – income and expenditure. Under the income part make a list of the income that you get from all sources. From this deduct your taxes – now you have the net income that is at your disposal. Then make a list of all your expenses. This might take some time, maybe even a month. Categorize your expenses into fixed and variable. Fixed expenses like car payments, insurance payments, rent or payments on a mortgage should be all listed in one section. These expenses will stay relatively the same each month and hence are called fixed expenses.
The other category is the variable expenses which include items like food, clothing, entertainment etc. These expenses vary month on month and can be controlled to a large extent. This is the area where you will almost always find scope for improvement. The important thing is to make a list of every penny that you spend. You may need to record all your expenditure and in a month’s time you’ll probably get a hang of where all your money goes. Once you have a list on income and expenditure you can sum both sides and check out whether you are have a deficit or a surplus. In case you have a deficit, you need to make allocations to reduce your spending. This means cutting down on your expenditure. Suppose you spend $300 a month on eating out. You can cut it down to $200 or even $150 and use the rest to pay off a debt. You should draw a budget in such a way that there is no deficit. Better still, you can create a surplus by cutting down on unnecessary expenses and using that money to get rid of your debt.