What does financial freedom mean to you?
Specifically, in terms of the income you need to live off?
When I ask people this question, I’m usually met with one or two popular answers.
One: $100,000. There’s no rhyme or reason behind why, other than its a round number that generally sounds okay.
Two: They cite whatever their current income is now.
What this tells me immediately is that some people still don’t know how to understand their finances in a way that leaves them working towards a tangible goal or figure.
The truth is financial freedom is never going to be possible unless you have a plan…a spending plan…that tracks your money. Do you see where I’m going with this?
That’s right – I’m talking about the dreaded ‘B’ word. Budgets.
Why is budgeting so important?
Budgets have had a bad rap over the years, often being considered boring, restrictive or overcomplicated.
However, budgets also make the world go round and can be a tool for empowerment. They are absolutely necessary to gaining financial freedom as they make you better prepared for the unexpected expenses (hello COVID) and put you in a better position to achieve your long-term financial goals.
A well-structured budget doesn’t need to go into miniscule detail about your spending habits, but it does need to provide clarity around where your money goes once it hits your account.
Not convinced yet? Here are three more reasons why you need to have a solid budget in place to help you work towards financial freedom.
Reason 1: It’s The Little Things That Add Up
Unfortunately, a lot of people only have a general idea about how much money they can spend each month, but don’t actually know the numbers associated with that. If you’re following that method, it’s going to be far too easy to lose control of your spending habits.
A lot of the time there is money coming and going that you’re not even aware of. I call it the fritter factor. The stuff that you don’t think about that just adds up. A coffee here and a takeaway dinner there.
All of a sudden, you’re dipping into savings because of these unexpected things you haven’t factored into your everyday spending, have totalled more than you thought.
It’s not to say you can’t do these things – we absolutely need to treat ourselves regularly for our own sanity. But we do need to understand where those things fit and allocate funds for them, so we’re not left scratching our heads wondering where that $100 went.
Reason 2: Planning Doesn’t Mean You Stop Spending
Budgets don’t have to be restrictive. They’re aimed at helping – not hindering – the way you live your life. So have the barista coffee! Have the smashed avocado on toast! Factor your wants and splurges into your budget so you don’t have to feel guilty about tapping into your savings later.
If you don’t know how to start planning, look into your transaction history and get a thorough understanding of where your money is going. From there you can begin to allocate how much you’ll need to put aside for each category so you can maintain the lifestyle you want.
An even simpler method for first time budgeters is the 50-30-20 rule (which you will need to adapt to your income):
50% goes to your needs: Necessary costs like rent or mortgage, electricity, groceries, petrol, etc.
30% goes to your wants: The things you enjoy doing like going to concerts, going out for dinner with friends or buying shoes.
20% goes towards your financial goals: The goals you have set yourself like saving for a house or paying off a large debt.
Any plan is better than no plan at all, but a good, strategic plan will help you to feel more financially free much sooner.
Reason 3: Being Financially Free Means You Can Focus On Wealth Creation
Budgets are more than just a means to track your spending. They’re also a tool for helping to build your wealth.
When you have a comprehensive overview of where your money is moving each month, you’ll realise where those extra funds are that can be funnelled into your chosen method of wealth creation – whether that’s investing in property, the share market or a side hustle.
Getting in the habit of reviewing your budget will also help to shave off unnecessary spending that provides little to no value towards your long-term goals.
It’s time to start changing our mindsets towards budgets, seeing them less as an inhibitor and more as a facilitator for understanding your money and the potential it has.
Getting Started
If you’re interested in learning more about how to create your dream financial future, join our free seminar, specially designed to help you create wealth through property investing.
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Sue Irons
CEO – Positive Real Estate NZ
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