Most of us have no idea where our money is going. We think we know, but we don’t really know. This is doubly true for those who are married or live with a significant other. Ergo, the first step toward financial freedom is establishing a written monthly budget. Note the three key words here: written, monthly, and budget.
Important guidelines guidelines:
Identify what’s truly necessary by identifying all of your monthly expenses based on the past six months, and then divide your expenses into three categories: Need, Want, Like. Write down every expense (food, housing, utilities, insurance, cars, gas, transportation, clothes, credit cards, phones, Internet, pets, entertainment, etc.); triple-check the list with your significant other or a friend; and then use your Need, Want, Like categories to prioritize and cut wherever you can. The stricter you are, the sooner you’ll be free.
Give every dollar a destination at the beginning of the month. By establishing these boundaries, you won’t worry about what you can and can’t purchase because money that wasn’t assigned at the beginning of the month can’t be spent mid-month.
Teamwork leads to financial freedom.
Everyone in your household—even your children—must have a say in the written budget. This is the only way to get every person’s buy-in. Working together means taking from one category to fund another (e.g., extracting money from, say, your clothing budget to fund your entertainment budget) until each person is on the same page. Once everybody is on board—once everyone is committed to financial freedom—it is much easier to gain the traction you need.
Adjust for financial freedom.
You’ll have some slip-ups along the way. That’s all right, it’s part of the process. At first, you and your family should scrutinize your written budget daily, and then eventually weekly, adjusting accordingly until your whole family is comfortable with your set monthly allocations. The first month is the most difficult, but by the third month you’ll curse yourself for wasting so much money during your budget-less days.
Shit happens, so it’s best to create a Safety Net savings account with $500–$1000 for emergencies. Now listen: do not touch this money unless there is a true emergency (car repairs, medical bills, job loss, etc.). Your Safety Net will allow you to stay on budget even when life punches you in the face. Over time, once you’re out of debt, your Safety Net will grow to include several months of income. But for now, worry only about the first $500–$1000 to start, which you’ll want to keep in a separate Safety Net account to avoid temptation.