The Simple First Steps to Financial Freedom

posted in: Money Blog

You’ve said it a million times, you need to get a grip on your finances. But this time you mean it because after looking at your empty bank account, yet again, you are starting to realize that there is no other option.

Simple Steps To Financial FreedomIt may not be comforting, but know that you are not alone. A recent Bankrate.com study found that 37 percent of Americans are one unexpected expense, like a big medical bill or car accident, from financial disaster. Although the choices and sacrifices are often hard, the first steps to financial freedom are simple: honestly assess your financial situation, create a budget and eliminate non-essential expenses or find more cost-effective alternatives.

Start by Assessing Your Financial Situation

Before making any decisions, it is important to first take the time to assess your financial situation. Start by determining your income and assets, counting only money that you can rely on (so no gambling winnings). Be sure to calculate the net, or take-home, pay. Next, make an honest assessment of your expenses including both fixed bills (car payments, utilities, loan payments, etc.) and variable costs like food and entertainment.

To get a handle on your variable expenses, go through your bank statements for the last twelve months and categorize your monthly spending. Make sure to consider periodic expenses like oil changes and holiday gifts as well.

Now that you’ve gathered all this information, you should have a good idea as to whether your financial obligations outweigh your income and by how much. Once you know this, you are in a better position to build a workable budget.

Envelope Budgeting

One of the most important steps you can take in getting out of your financial rut is to make a budget and stick to it.

Of course this website will certainly encourage you to use “The Budget Kit” system which offers a paper approach with a workbook or an Excel spreadsheet approach that totally matches all the worksheets in “The Budget Kit” workbook.

There are great tools to go along with “The Budget Kit” system like the following product. With all of the financial software and apps available, building a budget using paper envelopes may sound primitive, but it has actually proven effective for many people. Money Crashers describes five steps to creating an envelope budget:

  1. Decide how much money you have available after you’ve paid your fixed bills and set money aside for savings.
  2. Decide on a budget, dividing your discretionary money between categories like groceries, gas and entertainment. The information you’ve collected when you assessed your income will give you a good idea of how much you generally spend in each area. If you are tracking your spending with “The Budget Kit” then you will be clear about what categories to use for your envelopes.
  3. Withdraw the allotted amount of money for each category at the beginning of the month and put it in a corresponding envelope.
  4. Use only cash for expenses. When the cash in the envelope is gone, you cannot spend any more money in that area until the next month (or pre-determined period). Cash is so much more tangible and provides very visual and “live” information.
  5. At the end of the period, use any leftover money to pay additional funds toward the debt you are working to pay off.

Eliminate Non-Essential Spending

One thing your financial assessment will hopefully highlight is potential ways to cut spending. There are a few common areas for budget trimming, from household expenses to unnecessary work costs.

For example, consider whether you and your family could live without cable, and instead stream free TV shows. Likewise, take an inventory of any magazine subscriptions, online accounts and memberships and eliminate any that are not essential to your job. At work, bring in food for all lunches and breaks, including any coffee drinks.

Find Cost-Effective Alternatives for Other Expenses

Eliminating all variable expenses is not realistic in the long run for people trying to stick to a budget. Many will find it impossible to live without a phone or Internet plan and going without filling up with gas or food is out of the question.

For those expenses that you can’t eliminate, save by using price comparison tools to look for more cost-effective alternatives. When comparing services, you can often find a website like Top 10 Cloud Storage, which analyzes the pricing and features of the top cloud storage providers. For goods, U.S. News recommends saving money using price comparison tools such as InvisibleHand, PriceGrabber or PriceBlink.

Now go out there and get started with the first step for financial freedom.