Wednesday, 18 April 2012

Budget Planning And Your Financial Freedom

Budgeting and Cash Flow.....two simple phrases that you would expect to learn the meaning of in grade school. If not, certainly by High School. Well guess what...NEITHER!!! I suspect this is the main reason why so many young people get into financial trouble at such an early age. They have no idea how the whole process works. Did you hear the joke about the newlyweds says "Why do we always run out of money before we run out of month", the other one snaps back "We can't be out of money, we have plenty of checks left!" The truth of the matter is that without proper budget planning, your financial freedom will be at risk!


When starting out to prepare a budget you must keep one underlying principle at the front of your mind. That is Honesty is the best policy. When you first start out, you have to do some estimating. Here is where you have to be truthful to yourself. For instance, if you are trying to figure out how much you spend on food each day, don't forget the daily stop to Java Palace on the way to work, or the afternoon snack at the office canteen etc. etc. A well thought out Budget will keep you on track to meeting any and all the goals that you set for yourself. Additionally, just writing down everything on paper that you are going to need when budget planning will help you uncover all the black holes that mysteriously consume your paycheck, month after month. Once you have your Budget in place, honesty has to kick in again. You have to honestly try to stick to your Budget or else you will fail. It does not happen automatically. There will be certain parts of Budget Planning that you can put on auto pilot. Doing so will help you in your quest to achieve financial freedom.
So where and how does one begin to make a Budget. Since I did not learn it in school either, it was a rather fortuitous encounter that started me on the road to never bouncing a check or never getting a collection phone call. Many years ago, while applying for a new auto loan, the bank had some loan documents prepared for me to fill out. One of them was a Personal Financial Statement (PFS). I filled it out then and I have been filling one out every year since. I think it is the greatest tool to learn how to budget. If you have never seen one, go to your local bank branch and ask for a PFS. If they ask why, just say you are preparing to apply for a mortgage. Anyway, I haven't gotten one from the bank in a long time as it is very easy to make your own PFS. In a nutshell, here is what you do. Get a blank piece of paper and draw a line down the middle. At the top of the left side, title it INCOME, and at the top of the right side, title it EXPENSES. Now here is where the fun starts. Back to the left side...write down all your sources of monthly income on an after tax basis. This is important because you cannot pay bills with before tax income, meaning your gross paycheck number is of no value for this exercise. Also keep in mind that if you get paid weekly, take the after tax number and multiply by 52 and divide by 12 to get your true monthly after tax number which is higher than just multiplying your weekly number by four thanks to that extra week that will sneak in once every quarter. When finished, add up the left side to get your total monthly income from which you can work your magic. Now move over to the right side. Start by listing all your monthly expenses that are fixed, meaning they are the same every single month as in your home mortgage and your car payment and your utility bill if you have balanced billing, which by the way if you do not have balanced billing, you should consider it as it will help you stay on track. When you are finished listing all your fixed monthly expenses, start listing all your variable monthly expenses. Here is where some estimation may occur. Do your best to guess and do not leave anything out. Don't forget birthday gifts, entertainment, bowling night, newspapers and the daily Java stop if it fits. Last, put in a miscellaneous category, because you know you are going to need it. Add up the right side. Is the number greater than or less than the left side? If it is less than the left side, you are in fine shape for performing budget planning. If it is less than the left side, you have some work cut out for yourself if you want to succeed with financial freedom.

If the answer above was positive or in other words, you are spending less than you are bringing home, then Congratulations are in order. You are in good company and on the path to financial freedom. You probably have some good habits drilled into you from your upbringing or some other source of financial know how. Let me ask you one question. When you listed all your expenses on the right side, did you make an entry for your self? Did you include an entry called savings? Are you putting any monthly income into a 401(k), I.R.A. or funding any type of retirement planning? I suspect you are addressing this most vital aspect of your finances. One other question. You did include credit card debt right? Is this number growing, declining, or remaining the same? Again, if you are in this camp, I suspect all is well on this front.

If the answer above was negative, well then you just might be related to the couple we spoke about in the beginning that runs out of money every month before running out of month! What to do? In a word...DISCIPLINE! It takes discipline to put your finances in order. One of the reasons that your number is negative is because you were honest enough to write down ALL your expenses and that is a good thing. However, your day of reckoning has arrived. Now you have to start doing some inner reflection. You must ask yourself "Of all those things on the expense side...Do I really need all that stuff?" Is 5 monthly magazine subscriptions really necessary? Is it so important to go out to eat once a week? How about once a month instead! If you made that one change alone, not only would your budget planning look better, but when you actually did go out, it would take on much more significance. Believe it or not, it will bring you more pleasure than the "weekly grind" of going out to eat. If you don't like the word discipline, than I will throw out another word at you...TWEAKING. Time to start tweaking the right side of the sheet. Take a long hard look at every single entry, line by line to determine where you are going to tweak. This is the only way to make the right side fall in line with your resources. Sure you can increase the left side, but that is easier said than done.

Now that you have a general idea of how to start building a budget, we need to turn our attention to fine tuning the right side of the equation because in the early going, that is where you have the most control. For the time being, the left side is out of your control. Sure you can work more hours or get a second job or start a side business all of which will raise the income side of the equation, but as we just mentioned, that is easier said than done. Get this part of budget planning right and your financial freedom will become a reality before not too much time passes by!

Chris Borg is a practicing pharmacist and financial adviser who writes about health care and investing. Chris's latest website on financial freedom is at RatraceBgone, where Chris provides financial tips such as the 9 steps to financial freedom: 9 Steps To Financial Freedom

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