The Young Person's Guide to Financial Freedom
I recently came across financial stability.
I don’t define this as being rich, having tons of excess cash, or having tons and tons of gold from Oliver the Cash Man. Instead, it just means that I am able to pay my bills before their due date, buy something when I want it, and have money left over for a rainy day.
Part of this process has been becoming a lot more realistic about my expenses, a lot more realistic about my income, and finally, planning for the future.
This three step process is one that I have been practicing for a while, and have encouraged others, especially young women looking to take reign over their finances, to try also. Here is the three step plan in detail, and perhaps your guide to becoming more financially stable, with a reserved tank of funds for all of life’s expenses.
Before diving in, you have to figure out your monthly income. If it varies from month to month, work out an average from your last 6 months of pay. Once you have a solid number to work with, things become much easier.
1. Calculate your expenses, and be realistic.
Your expenses are pretty much anything you spend money on. This includes your bills, which are your needs, your variable expenses, which are most often your wants, and all the other miscellaneous things you pay for in between.
According to financial guru Gail Vaz-Oxlade:
50% of your monthly income should go to your needs monthly.
25% of your monthly income should go to your wants monthly.
10% of your monthly income should go towards savings monthly.
15% of your monthly income should go towards your debt monthly.
For instance, if your monthly income is $1000.00, you should spend up to $500.00 on things like insurance, your phone bill, your groceries, and rent, if you pay it. If you find that you spend more than 50% of your income on needs monthly, it’s time to rethink, and recalculate.
Can you really afford to live on your own, or is it time to get a roommate?
Is your phone plan too expensive?
Despite these expenses most often being fixed, there is always an alternative, and there is always a solution.
2. Be more realistic about your income.
I recently started working in a cheque cashing store that offers payday advances. You would not believe the amount of people that depend on payday loans to survive until their next payday. This illustrates a huge discrepancy between what the individual is making, and what they are spending.
If you are not making enough money, and have to fill the gaps with credit, loans from friends or family, or payday advances, you need to do something about it. This means finding another job that pays you more, working more hours, or getting another job that will put an extra couple bucks in your pocket per month. By depending on credit to give you what you don’t already have, you are entering into a spiral that can be very detrimental, and very hard to get out of. The interest rates are lethal.
The best thing to do is make more money, rather than look for ways to just have more money, because in the end, you will have none.
Or, if you do have money, it’s never really yours.
3. Plan for the future.
This is actually my favorite part of budgeting. It allows me to look at my future with hope and confidence rather than with sadness and frustration, which is the case for a disheartening amount of people.
Planning for the future isn’t necessarily opening an RRSP at the age of twenty, although if you can, you really should. Planning for the future is as simple as being aware of your bills and their dates one or two months ahead of when they are due.
For me, I have a Windows Excel spreadsheet. In the far left column, I write down all the categories I could possibly spend money on, things like travel, gas, insurance, clothes, entertainment, food, even a category for “miscellaneous” things that don’t fit into any category!
The columns at the top are the two weeks I have with each paycheque, and beside the date I put how much money I have to my name in total. Beside each category, I write down what I have spent every night before I go to bed. I call it “updating my finances”.
In the far right column, I write down whatever bills I have due that month. For instance, my phone bill is usually about $100.00/month, so I put that in red ink in the “Phone Bill” column. When I pay it, I change the red to green. It’s much easier on the eyes. I also write down what events are coming up that might cost a bit more money than usual, or a birthday that might require a gift, that way, I budget for these things, saving me the headache of being unable to afford to go out with my friends for a night, or buy a gift for a friend I really wanted to simply because I “had no money”.
Ever since I started writing down what bills I have due at the end of this month or next month, it has encouraged me to split the payments throughout the month instead of waiting until they are all due at the end, leaving me with no money for everyday life.
The three step process of results for this three step process of financial planning, you ask?
1. I have a lot more extra cash.
And by extra, I mean cash after I go shopping. Cash after I pay my bills. Cash after I go out to dinner. Being more aware of your money really helps to stop you from spending it all at one time, and all in one place.
2. All my bills are paid on time.
In life, you have to meet deadlines, whether it is for assignments, submissions, or finishing a book to bring it back to the library on time. Some of the most important deadlines you will have to meet are the financial ones; the ones that go on your financial credit report and determine whether you are a risk to creditors, landlords, and employers. Being able to meet and honor deadlines is being an adult.
3. I am less stressed about money.
I used to sit in my room and just stress out about paying this and that and constantly feeling like I never had enough money.When I realized that it wasn’t a case of not having enough money, it was simply a case of spending it on the wrong things, I felt richer. By knowing what portion of my money goes to what, I know what portion of my money I have for recreation and entertainment, and I can spend within that limit. I also get the added comfort of knowing that I am still saving, knowing that I am still paying my bills, and essentially, knowing that everything looks bright.
So there it is guys.
Some people spend their lives and their money obsessed with Nikes and Jordan’s; a pair of shoes that could pay a bill, or be tucked into a savings account. A pair of dunks won’t pay your mortgage when it’s time to buy a house. And surely, if all your money goes to shoes and clothes, you won’t even have a down payment. Is it really worth it in the end? You might look like the coolest guy on the block for the time being, but really, you're just poor and cool. Think about it.
While it is important to enjoy your money, it is much more important to make sure you have money to enjoy.