Sunday, October 9, 2016

Financial Freedom: Finding a Starting Point

Financial Freedom:  Finding a Starting Point

Being poor as a child taught me the value of hard work and determination.  I am not sure what having money teaches a child.  I imagine that it gives them the freedom to just be a child.  Hard work and determination were not gifts bestowed upon me.  The fact is that I earned them both.  That being said, I will also have to earn my freedom.

When people say that they want to be rich, I am not sure if that is what they really mean.  I suspect, they really mean that they want to be free.  Don’t we all want that?   It’s the freedom to do what we love regardless of what it pays.  It’s also the freedom to have control over our own time.  It’s also about opportunities.  Have you ever missed out on opportunities because you couldn’t afford them?  I have, and enough is enough. 

But where do I begin?  If my finances are a journey, and I am plotting along on a road to financial freedom, it seems vital to know where I am starting from. 

Step 1:  Track your expenses

Most of us don’t actually know what we are spending or what we are spending it on.  Spend at least 1 month doing this.  I spent several months on this activity.  In this first month, try to spend as you would normally.  Not more, not less.  The point in this activity is to find out where you are starting from.  Honesty is key.  Collect every receipt.  If you don’t get a receipt for something, keep a pad of sticky notes or something with you and immediately jot down the dollar number and what it is that you purchased.  Then stash the receipts somewhere.  I use a cigar box.  At the end of the month, make a date with yourself.  Pour yourself a glass of wine (you’ll need it), and dig in.

Sort the receipts into piles of “like purchases.”  You can take a little creative liberty here in choosing your categories.  Remember this is just a rough sort.  Now, very quickly pick up each pile and leaf through it.  Does everything you see truly belong in the same category?  My realization was that my “food” category really needed to be three categories, so it became “food”, “date night,” and “liquor”.  Now, don’t judge yourself, just be honest.  If you find that you have seven receipts for coffee, maybe you ought ask yourself “Is that a major category for me?”  Or at the very least, is it deserving of its own pile? 
Once you are happy with your categories, either grab a notebook that is designated for this purpose only, or open a spreadsheet (for those technological types).  Start writing down all of your spending categories.  This is a combination of the categories you created when you sorted your receipts, and your monthly bills.  Next to these categories, make a column for your estimated spending.  Now, do NOT calculate anything yet.  Just write down how much money you THINK you are spending in any given category per month.  After you are done, gather all of your monthly bills, and you get to start totaling.   Next to your estimated total, you will enter your actual spending amount for the month.  Then total both columns and compare them to your after-tax income.  Did you think you had a surplus?  Deficit?  What was the reality?  Do you have a surplus at the end of the month or are you in the red?  This is where the wine comes in.  Stop judging yourself and study your numbers.  Are you uncomfortable with what you see?  I was, but that’s okay.  All great journeys start with a roadmap, but a roadmap is no good to us if we don’t know where we are starting from.  Where our finances are concerned, the roadmap is our budget.  Now, of you might be thinking “Lacy, didn’t we just create a budget?”  The short answer is “no.”  We did not create a budget, we found our starting point.  We are being honest with ourselves, and have begun our journey.  We will look at budgets next.

What interesting thing did you learn when you tried doing this activity for yourself?

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