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Developing a Budget and Sticking to It: The 1st key for financial freedom

Updated: Feb 16, 2023


As a continuation to my previous post Essential Principals for Achieving Financial Freedom, I would like to delve deeper into one of the most crucial steps towards financial freedom: developing a budget and sticking to it. But before we dive into the topic, let's start by defining what a budget is.


A budget is simply a plan for how you will spend your money. It is a tool that helps you keep track of your income and expenses and ensures that you are living within your means.

Now that you have a basic understanding of what a budget is, let's look at two examples of people with different approaches to budgeting.


Meet Jack. Jack never created a budget for himself and simply lived from paycheck to paycheck. He never thought about how much money he was spending, and as a result, he found himself constantly struggling to make ends meet. Despite earning a decent income, Jack always seemed to be short on money and was constantly in debt.


On the other hand, we have Ernest. Ernest was determined to take control of his finances and decided to create a budget for himself. He sat down and made a list of all of his income and expenses. He then allocated his income towards necessary expenses such as housing, food, and transportation, and allocated a portion for savings and investments. He also made sure to factor in his fun expenses, such as eating out or entertainment.


So, how can you develop a good budget like Ernest's? A commonly recommended budgeting plan is the 50/30/20 rule. This rule suggests that 50% of your income should go towards necessities, such as housing, food, transportation, and insurance. 30% should be allocated for lifestyle expenses, such as entertainment, eating out, and hobbies. Finally, 20% should be saved or invested. Another ratio that is often recommended is the 70/20/10 rule, where 70% of your income goes towards necessities, 20% towards savings and debt repayment, and 10% towards wants. Of course, these ratios may not work for everyone, and it's important to find a budgeting plan that works for you and your unique financial situation. But, the important thing is to start somewhere, and this ratio can serve as a good starting point.


Ernest, being a good example of budgeting, could have a budgeting plan based on any of these ratios or a variation that works for him, but it's important to note that what's most important is finding a budgeting ratio that helps you reach your financial goals while still allowing you to live comfortably. By creating and sticking to a budget, Ernest was able to achieve financial freedom. He no longer struggled to make ends meet, and he had peace of mind knowing that he was in control of his finances.


Now, let's dive deeper into how you can create a budget that works for you and how you can stick to it, the steps to be followed to develop a budget can be found in setting financial goals, tracking expenses, implementing your budget, and reviewing and adjusting your budget.


Setting Financial Goals

Setting financial goals is a critical step in the journey to achieve financial freedom. Without clear financial goals, it can be difficult to prioritize spending, make informed investment decisions, and measure progress towards your desired financial future.

Budgeting is a powerful tool in helping you achieve your financial goals. It provides a roadmap for your spending and helps you stay focused on what’s important. By setting financial goals, you give yourself a clear target to work towards and can create a budget that supports your aspirations.

Here are some tips for setting achievable and realistic financial goals:

  • Be specific: When setting financial goals, be as specific as possible. Instead of simply saying, “I want to save more money,” set a specific goal, such as “I want to save $10,000 in the next year.”

  • Make them measurable: Set financial goals that are measurable, so you can track your progress and celebrate your successes along the way.

  • Set short-term and long-term goals: A combination of short-term and long-term goals will help you stay motivated and focused. Short-term goals could include saving for a vacation or paying off a debt, while long-term goals might include buying a home or retiring comfortably.

  • Consider your values: Consider your values and priorities when setting financial goals. For example, if you value education, you might set a goal to save for your child’s college education.

  • Create a plan: Create a plan for reaching your financial goals by breaking them down into smaller, manageable steps. Set deadlines and track your progress regularly to ensure you’re on track.

Setting financial goals is an essential step in achieving financial freedom. Budgeting can be an incredibly helpful tool in reaching your financial goals and should be an integral part of your overall financial plan. By being specific, measurable, and in line with your values, you’ll be well on your way to reaching the financial future you desire.


Tracking Expenses

Tracking expenses is a crucial step in budgeting and achieving financial freedom. It helps you get a clear picture of where your money is going, what you're spending it on, and how you can adjust your spending habits to reach your financial goals.


There are several methods you can use to track your expenses, and it's important to find the one that works best for you. One method is to use a budgeting app. There are many budgeting apps available that make it easy to track your expenses by automatically categorizing them, such as Mint, Personal Capital, and YNAB. All you need to do is link your bank accounts and credit cards, and the app will track your spending for you. You can see your spending in real-time, categorize your expenses, and even create a budget based on your spending patterns.


Another method is to create a spreadsheet. You can use Microsoft Excel, Google Sheets, or any other spreadsheet program to keep track of your expenses. You'll need to manually enter each transaction and categorize it, but this method gives you complete control over your data. You can customize your spreadsheet to meet your specific needs and see a visual representation of your spending habits.


If you prefer a low-tech solution, you can use a paper and pencil to track your expenses. This method requires you to write down every expense you make, either in a small notebook or on a piece of paper. At the end of each week or month, you can categorize your expenses and see where your money is going.


Regardless of the method you choose, tracking expenses is essential to budgeting and achieving financial freedom. It helps you get a clear understanding of your spending habits and allows you to adjust your budget as needed to reach your financial goals. By tracking your expenses, you can see where you can make cuts, reduce your spending, and prioritize your expenses to reach your financial goals faster.


Implementing Your Budget: The Key to Sticking to It

Now that you have set your financial goals and tracked your expenses, it's time to implement your budget. Budgeting is not a one-time process, but rather a continuous cycle of monitoring, adjusting, and sticking to your spending plan. To make the most of your budgeting efforts, it's essential to have a plan in place for implementing and sticking to it.


Step 1: Get organized

Organization is key to successful budgeting. Choose a method that works for you, whether it's using a budgeting app, creating a spreadsheet, or using a paper and pencil. Having all of your expenses and income in one place will help you see where your money is going and where you can make changes.


Step 2: Assign a dollar amount to each expense category

Once you have organized your expenses, assign a dollar amount to each category. Make sure to include all of your regular monthly expenses, such as rent, utilities, transportation, and food, as well as any irregular or annual expenses, such as insurance, taxes, and holidays.


Step 3: Stick to your budget

The most important step in implementing your budget is sticking to it. This may require some discipline, especially in the beginning. Avoid overspending by setting realistic budgets for each category and creating an emergency fund for unexpected expenses.

Step 4: Adjust your budget as needed Life is constantly changing, and your budget should reflect those changes. Regularly review your budget and make adjustments as needed. This could mean adjusting your spending in certain categories or finding new ways to save.


Tips for avoiding common budgeting pitfalls:

  • Avoid impulse purchases by making a list before shopping and sticking to it.

  • Avoid overspending by setting realistic budgets for each category and creating an emergency fund for unexpected expenses.

  • Avoid becoming too rigid with your budget by being flexible and adjusting it as needed.

  • Avoid ignoring your budget by regularly reviewing and updating it.

In conclusion, implementing a budget and sticking to it is crucial to achieving financial freedom. By setting financial goals, tracking expenses, and sticking to your spending plan, you can take control of your finances and work towards a better financial future.


Reviewing and Adjusting Your Budget

Developing a budget is a crucial step towards achieving financial freedom, but it is not a one-time process. It's an ongoing journey that requires regular monitoring and adjusting to ensure that it stays aligned with your current financial goals and situation. In this post, we'll dive deeper into the importance of reviewing and adjusting your budget.


Why Reviewing and Adjusting Your Budget is Essential

Your financial situation is always changing, whether it be due to changes in your income, expenses, or life circumstances. Therefore, your budget needs to adapt to these changes to remain effective in helping you reach your financial goals. Regularly reviewing your budget helps you identify any areas where you're overspending or underspending and make necessary adjustments. This way, you can ensure that your budget remains aligned with your financial goals and helps you reach them in the most efficient manner.


Benefits of Reassessing Your Financial Goals and Expenses

One of the key benefits of reviewing your budget is that it provides an opportunity to reassess your financial goals and expenses. This can help you ensure that your goals are still relevant and achievable, and that your expenses align with these goals. You may find that some of your goals have changed, and that your budget needs to be adjusted accordingly.

For example, you may have initially set a goal to save a certain amount of money each month, but later realized that it is not feasible with your current expenses. In this case, you can reassess your goal and adjust it to be more realistic and achievable. By regularly reviewing your budget and adjusting your financial goals, you can ensure that you stay on track towards achieving financial freedom.


Making Changes to Your Budget as Your Life Circumstances Change

In addition to reassessing your financial goals, regular budget reviews allow you to make changes to your budget as your life circumstances change. This can include changes in income, expenses, or life events such as getting married, having children, or buying a home. By making regular adjustments to your budget, you can ensure that it continues to support your financial goals, even as your life changes.


Tips for Reviewing and Adjusting Your Budget

  • Make it a regular habit: Set aside a specific time each month to review your budget and make any necessary adjustments. This can be a monthly, bi-monthly, or quarterly review, but the important thing is to make it a regular habit.

  • Use a budgeting app or spreadsheet: Use a budgeting app or spreadsheet to track your expenses and help you identify areas where you're overspending or underspending. This can make the process of reviewing and adjusting your budget much easier.

  • Be honest with yourself: When reviewing your budget, be honest with yourself about your expenses and whether you're staying on track with your financial goals. If you find that you're overspending in certain areas, make a plan to cut back in those areas.

  • Be flexible: Don't be too rigid with your budget. Allow for some flexibility and be willing to make changes as your life circumstances change.

  • Celebrate your successes: Celebrate your successes in sticking to your budget and reaching your financial goals. This will help keep you motivated and on track towards financial freedom.

Regularly reviewing and adjusting your budget is an essential step in achieving financial freedom. It helps you reassess your financial goals, adjust to changes in your life circumstances, and ensure that your budget remains effective in helping you reach your financial goals. Make it a regular habit, use a budgeting app or spreadsheet, be honest with yourself, be flexible, and celebrate your successes.


In conclusion, developing a budget and sticking to it is a crucial step in achieving financial freedom. By setting financial goals, tracking expenses, implementing your budget, and regularly reviewing and adjusting it, you can take control of your finances and work towards a secure and stable financial future. Remember, budgeting is a process that takes time, so be patient and persistent. Start small, make changes gradually, and don't be afraid to seek help if you need it. Stay focused on your goals and trust in the process, and soon enough you'll be well on your way to financial freedom.


Stay tuned for the upcoming posts about other essential principals for achieving financial freedom.


Sincerely,

Aladdin Abdulkareem

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