Start the Journey to Financial Independence With The Right Tools

Creating a managing a budget is the number one key to starting the financial independence journey.  Knowing the specifics around how much money you have to spend and where its going will enable you to adjust areas that of overspending.

What is a Budget? Budgeting Terms and Tips

A budget is an estimation of revenue and expenses over a specified future period of time; it is compiled and re-evaluated on a periodic basis. Budgets can be made for a person, a family, a group of people, a business, a government, a country, a multinational organization or just about anything else that makes and spends money. At companies and organizations, a budget is an internal tool used by management and is often not required for reporting by external parties.

Outline Your Budget

Our budget template is very straight forward and simple to complete.  I’ll walk you through the setup step by step.

  1. Start by adding your total income.

Include the income from all people contributing to your household.  Split out the additional types of income into other categories like real estate or other business income.  In this section include the total income for business-related areas,  you can include the expenses in another section in the sheet.

2. Add the necessary expenses.

Necessary expenses including payroll taxes, rent or mortgage, property taxes, charitable giving, utilities.  All of these are necessary for most people to maintain their home and standard living expenses.

3.  Add the discretionary expenses.

Discretionary expenses including car, gas, clothes, internet, restaurants.  These are all things that can fluctuate greatly from month to month.  Stepping back, most of these aren’t needed to live a life of freedom.  These are discretionary and should be looked at very closely.

4. Add investment spending/saving.

Since investment contributions come out of the overall income budget they are considered “spending” for the purposes of cash management.  Enter all of the investment contributions for brokerage accounts, 401k, 529, IRA.

Outline Your Savings

I’ve been using a number of different savings calculators, some are helpful, others are way too confusing.  Enter the number of years you have left before planned retirement along with your current savings balance.  The expected annual interest rate will be somewhere between 4%-8%.  On average, the market will return 7%-8% per year.

Review Years Until Financial Independence

After completing the savings calculator, you can start looking at how many years until financial independence is a reality.  Based on current or projected savings and percent return, you’ll be able to plan based on a specific withdrawal rate.  4% is the standard for withdrawal, this allows your money to continue to grow without depleting the principal.

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