Welcome back to primetime blogging! It’s your favorite personal finance blogger in the whole world or so I hope… I’m back again with another important topic here – budgeting/saving. This is a fundamental step to increasing your wealth and being financially free, which is so important. Everyone has different situations and amounts they earn so just try to personalize this as best as you can. There are a lot of budgets out there that are based off of percentages of your income and what not; I do not take this approach to budgeting. The budget approach I take is to live below your means. Financial freedom takes a few years of hard work, discipline, and sacrifice but you will have the ability to have peace of mind once you are there. Grab your pencil and paper and get ready to have knowledge dropped on you.
Mr. Nahas, can you please stop blabbing and start explaining the budget please? Well then…let’s go over the budget, so that you are able to be financially free!
This is where your will, persistence, and the desire to be financially free comes into play. You need to sit down and see where you’re spending your money. Take down the necessary expenses like housing, groceries, transportation, health expenses, phone expenses, debt, and everything that is absolutely necessary for your survival. Now make a list of all the unnecessary expenses like going out with friends, eating out, hobbies, subscriptions, daily coffee, and anything that is not essential and considered a luxury. Take a look at the essential list and see if there is a way to minimize the list. A couple examples would be to shop around for different car insurance rates or instead of buying name brand, you buy the great value brand or even shop for a less expensive phone plan. Now, move on to the not essential list. Ask yourself, do you really need that Dunkin Donuts coffee every morning? Is it essential to your living? Coffee might be needed for cognitive function, but an alternative would be coffee at home. What about eating out for lunch every day? Or what about the subscription you haven’t used in months? The point is to free up cash, so you can use it elsewhere. If you are serious about being financially free, you will make the necessary cuts. You don’t realize that all of these things add up and affect your budget. The coffee at Dunkin every day is $3, eating out for lunch is $10, that alone is $65 per week or $260 for the month but that doesn’t include maybe a bagel in the morning or a snack in the afternoon. I am not saying don’t spend anything or go out with friends but be conscious of what you spend because it adds up quickly.
Financial Safety Net:
Some people say to pay off debt first and then build an emergency fund, but I like to do the opposite in my budget. I like to build my emergency fund first, so that if there is an unexpected expense, I can pay that expense instead of overspending on my credit card or taking out a loan, which would just add to the debt. The emergency fund should be around six months’ worth of expenses give or take. I know this may be difficult for some people, but it is a crucial and necessary step. The last thing you want to do is have an unexpected expense or lose your job and be forced to add to the debt.
You won’t like this part, and I don’t blame you. This is where you have to practice patience and discipline to stick to your budget. It will take everyone a different amount of time to pay off debt, since everyone has different financial situations, but the principle remains the same. Pay off the debt aggressively, specifically credit card debt and student loans. I would start off with paying off the debt with the highest interest rate, which is probably your credit card debt and pay that off as soon as possible. You still have to pay your other monthly debt obligations. Mr. Nahas, what do you mean by aggressively though? That is a fantastic question Tina. By aggressive, I mean that any extra income saved from minimizing your expense or extra income through work promotions, side hustles, overtime, etc. should be used to pay off the debt that has the highest interest rate. After you pay off your credit card debt or student loans (if applicable), you could start to make extra payments on your car loan to save on the interest. In this scenario, I would see if there is a chance to refinance your loan for a lower rate. If you already have a low interest rate, I would suggest not making a lot of large extra payments. The reason being is that you might be able to earn a higher rate of return on an investment than the rate of return you would earn if you made larger payments on the car loan. If you would have peace of mind not having a car loan, you could split your cash flow by investing 60% of your free cash flow and leaving 30% of your cash flow for making extra payments on the car loan and the remaining extra 10% in cash (bank account). Okay, so I lied about the percentage thing…deal with it. If you do have a high interest rate, I would make extra payments as frequently as you can and refinance as soon as possible. The last part after you paid off your debts (student loans and credits cards) is to start saving money, so you can invest!
Now comes the fun part of your budget – investing! This can come in all sorts of ways. I will go in-depth about investing in another post. To give an overview, investing is where you will really start to build your wealth and gain financial freedom. Investing is all about acquiring assets that produce income streams and using those income streams to invest in other forms of assets and gain new income streams. The more income streams you have, the more wealth you will build and the more freedom you will have. Financial freedom comes from having more than one stream of income and more than one single asset. So, if one asset gets cut off for some reason, you have multiple others to pay for liabilities and to fund your life. There are so many different types of investments that will help you gain financial freedom but that all depends on your investment strategy and mentality. I don’t want to spoil my next blog post, so I will stop because I could go on and on.
This takes hard work, discipline, and living below your means for a while, but I promise you that it will be worth it. The last thing you want to do is work for a single source of income for 50 years or work 50 years just to have a few years of “enjoyment” when you are old. I understand that some people might love what they do and want to keep working in their field; that’s perfectly fine but never depend on a single source of income because one day, it could be cut off. I think that’s enough information for one day!