When you think of financial freedom, what comes to mind?
Being able to retire much earlier than the typical retirement age of 66 years and 2 months?
Having a large investment portfolio that generates interest income that you can live off of indefinitely?
Only continuing to work because you choose to, not because you have to?
I shared my ideas about financial freedom in a previous post, where I also shared my personal story.
However, I did not go into much detail about how to budget for financial freedom. Why is this important?
Budgets Help You Plan And Control
Budgets serve a primary purpose: they allow you to tell your money where to go.
A budget is simply a plan. When you create a budget, you take control of your financial present and future by planning your expenses and savings based on your income.
A budget allows you to be prepared for, well, anything. It’s not a matter of if something will happen. It’s a matter of when. This isn’t even about assuming the worst will happen.
Life happens.
Whether it’s a flat tire, costly home repairs, illness, or job loss, things will happen that require money.
Without a budget, you are putting yourself at risk of creating debt by using borrowed money for everyday expenses that should be covered by your income.
And, the reality is that not following a budget will put you that much farther away from reaching your goals, particularly if your goal is to be financially free one day.
Okay! Without further adieu, here is your 5 step plan to budget for financial freedom!
Step 1: Start With Income
The first step to budgeting effectively is knowing how much income you are earning.
Whether you earn weekly, bi-weekly, or monthly, you must have an accurate accounting of how much money you are working with.
Here are a few questions to consider regarding income.
- What is your take-home pay after taxes and deductions? In other words, how much money is deposited into your account each pay period?
- How much money do you need to make to cover your fixed expenses? In other words, what is your bare-bones budget income?
- Do you earn an irregular income? If so, do you have a reserve fund to dip into if you don’t make your bare-bones budget income?
- Do you have a way to make quick money if you come up short? What are your side hustle options?
Although I do not share my personal income online, the numbers below will indicate how much income I need to cover all my expenses. At the very least, I need to cover my fixed expenses every month.
I also need to cover some variable expenses, such as groceries and gas for my car.
Step 2: Determine Your Fixed Expenses
Your fixed expenses are your non-negotiables, including rent/ mortgage, utilities, and minimum debt payments.
The good thing about fixed expenses is that they typically won’t change from month to month, so you’ll know what to expect.
On the flip side, these are line items in your budget that you are not likely able to cut. So, you’ll need to be prepared to pay them to avoid late fees or going into debt to cover them.
My Fixed Expenses = $1833
- Tithe $300 – I am a Christian and believe in the biblical principle of tithing. I tithe 10% of my monthly income. For this budget, I will set the tithe at $300.
- Rent $910 – to decrease my monthly expenses, I moved from a 1 bedroom to a 2 bedroom apartment.
- Power/Electric $60 – I live in a small apartment, so I am able to keep utilities pretty low. I also keep my thermostat set at 78 degrees in warmer months and 68 in colder months. I also use a space heater on those really chilly days and nights.
- Gas $40 – This bill is usually less than $40 per month, but I estimate high just in case
- Internet and Landline Phone $71 – I need a fast Internet connection and a landline to run my home-based business. I allocate funds from my business expenses to offset some of the cost.
- Cell Phone $25 – I use Republic Wireless, and my plan is unlimited talk and text with 1 G of data. I work from home, so I always use my home WiFi. You don’t have to spend a fortune on cell phone plans!
- Auto & Life Insurance (combined) $170 – I have used State Farm for nearly 20 years and, while I could probably get my auto insurance lower, I trust them. If it ain’t broke, no need to fix it!
- Health Insurance $200 – I know. This is a very high monthly premium for healthcare. Because I am self-employed, there is no employer covering a portion of my monthly health insurance premium. I use the Affordable Care Act Marketplace for plans that fit my needs.
Step 3: Figure Out Your Variable Expenses
Unlike fixed expenses, variable expenses are those monthly costs that you have more control over.
You can decrease or increase them, based on your income fluctuations or need to save more money that month. A no-spend month is a great way to save on variable expenses!
Keep in mind that, although you can cut these expenses if needed, constantly having to whittle down your budget to fit your income is not sustainable for the long term.
If you find that you are doing this month after month, it is likely that your income is not sufficient to meet your budgeting needs. Therefore, you’ll need to figure out a way to make more money.
My Variable Expenses = $340
- Groceries $200 – Thanks to inventory meal planning, I have been successful in sticking to my grocery budget.
- Household $25 – These are monthly household necessities like cleaning products and other non-food items. Some months, I don’t spend anything in this category.
- Fuel $50 – I work from home, so I rarely drive. I fill up my tank every other week or so.
- Car Maintenance $7 – Monthly car wash fee. If I need repairs, I will take funds out of my car maintenance sinking fund (see below).
- Netflix $8 – no explanation needed!
- Personal Spending $25 – fun money to spend on whatever I want. Sometimes I’ll save up this money for a big purchase. I believe in having fun on a budget!
- Restaurants $25 – I rarely eat out but believe it’s important to budget for the occasional dinner with friends.
Step 4: Add Up Your Debt
For many people, coming to terms with their actual debt load is difficult.
In a financial community that loves debt-free screams and retiring before 40, debt is seen as a barrier to living a full life.
And, if you are living with debt, it may cause feelings of shame, guilt, embarrassment, and even depression and anxiety.
I can definitely relate to some of these emotions, as I used to have a pretty large student loan debt that I carried for over 15 years.
Money Crashers published an excellent article, giving great advice for avoiding this debt-based shame that haunts many people.
My Debt Payment = $0
On December 31, 2018, I made the decision to pay off the remaining balance of my student loan, approximately $26,000!!
I am grateful to say that I am now debt-free!
If you are working toward debt-freedom, I encourage you to avoid that fear-based, scarcity mindset that plagues many people during their debt-free journeys.
Whether your debt is a result of poor choices (we all make them!), a desire for higher education, or a need to survive, the truth is that you can overcome it.
Your debt is only one part of your life’s story, and does not have to define you. I encourage you to write a new story, making a plan to pay off your debt and reach other financial goals along the way.
Step 5: Budget For Savings
Next to paying off debt, I firmly believe that building a healthy savings is important for financial freedom.
If I’m being honest, I sometimes feel financial anxiety when I think about how long it will take me to reach my savings goals.
But, the good thing is that I have a plan!
My current priority is to rebuild my emergency fund to one year of expenses. This is a lofty goal and will probably take me at least a year to achieve, depending on my income.
As long as I continue to earn consistently, live frugally, and budget responsibly, I will reach my goal. And, so will you!
My Monthly Savings Goal = $600
- Reserve Fund, varies – whatever is left over after my expenses becomes my reserve fund. My goal is to have at least one month of expenses at all times in my reserve fund. Once I am a month ahead, extra income is allocated between the Emergency Fund and other savings funds.
- Emergency Fund $500 – my goal is to have one year’s worth of expenses saved in an emergency fund by the end of 2020!
- Car Maintenance $25 – fund for things like tires, oil changes, etc.
- Health & Wellness $25 – a savings account for medical and dental bills
- Gifts $25 – includes all gifts, birthdays and Christmas
- Clothes $25 – a fund for clothes purchases throughout the year. Since I work from home, I don’t need a huge wardrobe. But, I enjoy buying a few pieces seasonally.
Total Expenses = $2763
Difference (Reserve Fund) = $237
How Will You Budget For Financial Freedom?
I hope my transparency in sharing my own budget will inspire you to create yours.
Please keep in mind that budgeting is a very fluid process. You will not be perfect at it and it is highly likely that you’ll discover things that don’t work for you. Don’t be afraid to make changes as needed.
Also, as you set your financial freedom goals, keep in mind that you should continue to enjoy life during the process.
Budgeting isn’t about living a rigid life with no enjoyment. It is about developing the discipline to manage your money so that you can not only reach your goals, but maintain them for the rest of your life.
How do you plan to budget for financial freedom?
Malika, I love this. You are super detailed and organized. I am in awe. This came at the perfect time. This month we have been working on redoing our budget. The hardest part for me is figuring out how to cut corners in groceries with a family as big as ours. I’m clueless when it comes to coupons. Any suggestions?
Hi Terrie! Thank you so much for your kind words. I totally hear you about the grocery budget. I think food is one of the biggest areas where we overspend. Now, I’m a household of one, so I cannot imagine what this is like for a large family. Also, I am not a couponer because I’m only shopping for myself; I try to keep my food inventory low to avoid waste and also because of limited space. I do believe that there are things that anyone can do, regardless of household size, that can help you save money. One things I’ve started doing is Inventory Meal Planning. I start with what I have and come up with meal ideas based on that. This has really helped me a lot over the past few weeks because I’m only buying food that I need based on the meal plan I created. I will be sharing about this in my next blog post, so look out for it! Thank you for commenting!