Budget your way to financial freedom

Financial freedom is something every one of us aspires for. It’s the freedom that comes with not having to worry about running out of money or being hunted down by a swarm of debt-collectors.

The good news is, that with a little effort and a workable financial budget, we can earn this freedom … and it’s a whole lot simpler than you might think.

To be clear, you don’t need to be an accountant to draw up a budget, anyone can do it. It’s just a matter of being thorough and completely honest with yourself when following the four steps to financial freedom:

Step 1: Identify your financial goal

The first step when creating a budget is to define your short, medium or long-term financial goals.

Short-term goals are those you’d like to achieve within 1 year, such as saving up for a family holiday, paying off a credit card, or settling the outstanding balance on a new appliance.

Medium-term goals – within 5 years, such as saving for renovations to your house, saving enough to apply for a business loan or maximising your deposit on a new vehicle.

Long-term goals – after 5 years, such as reducing the term of your home loan by increasing your monthly payments, investing money into a university fund for your children, or maximising monthly contributions to a retirement fund.

Step 2: Identify your income and expense

To draw up a budget, you need to know exactly what you’re earning (income) and spending (expenses).

Income includes all earnings like your salary (after tax), commissions, self-employment earnings, pension, child maintenance, spousal support, and investment income. Expenses include everything you spend money on such as a home loan, insurances, security, groceries, donations, employee salaries, cell phone contracts, school fees, clothes, material possessions and entertainment.

Begin by listing and categorising all your income and expenses on a sheet of paper or in an Excel spreadsheet, whichever is easier for you.

Use your bank statements as a starting point for your income/expenses and don’t forget to include any retail credit cards that might have outstanding debt on. Make a point to look through previous bank statements to identify once-off and/or annual expenses that should also be included.

Step 3: Analyse your finances and highlight unnecessary expenditure

A good rule of thumb is to add 10% to your expenses to cover any forgotten or unanticipated expenditure. Once complete, subtract your expenses from your income to see whether you’re earning more than you’re spending … or spending more than you’re earning.

Now that you have a feel for your income/expense status, you need to find a way to incorporate your financial goals. As is often the case, spending needs to be trimmed to accommodate your goals. A good way to do this is to run through bank statements and highlight all your unnecessary expenditure.

This certainly shouldn’t include any health, security and insurance items – rather than compromising on these, try to negotiate better premiums or shop around. Most often, unnecessary expenditure relates to the buying of things we ‘want’ rather than ‘need’ – especially when it comes to material possessions and entertainment.

Having done this, allocate your trimmed budget against each category, thus showing current expenditure versus budgeted expenditure. Note that your trimmed budget cannot exceed your income or you will run yourself into debt.

Step 4: Take action and monitor your budget

Adopting a budget will inevitably lead to some lifestyle changes, but their impact can be minimised by being shrewd with your money. For instance, be happy to lag the tech-curve (buy older technology), adopt a sugar-free lifestyle, buy second hand, resell your television, and wait for sales when making large purchases.

It is hugely beneficial to monitor your expenditure against your budget regularly, so that you can identify over-expenditure early and trim it before you run into trouble. This due diligence will keep you well on track to achieving your financial goals.

Remember that your budget is a live document … it must evolve over time in line with your personal circumstances. This means that updates and fine-tuning are all part of the monitoring process.

Lastly, always keep yourself motivated with short-term goals/rewards and never forget that all the effort you put into your budget will go a long way in helping you realise your financial freedom!