How Budgeting Leads to Financial Independence and How to Get There

How Budgeting Leads To Financial Independence And How To Get There

How Budgeting Leads to Financial Independence

Americans are in a debt that has no precedent. Excess usage of the credit card and student loans are two of the major factors in this debt epidemic. These are the most obvious factors but at the heart of everything there is something more subtle. We aren’t sure how to save.

How would you feel if tomorrow morning you were to wake up realizing that you were financially independent–that you had enough savings to handle any disaster, that you were building a nice retirement fund and that you had zero debts? My guess is, you’d feel pretty darn good. None of this is unlikely but everything begins with the creating of a budget.

Why a budget is critical

Because it has such a bad connotation, you can easily to get spooked by the word budget. You may think, “financial straitjacket” when you hear the word budget. Besides, it takes a lot of work to stick to a schedule. But you shouldn’t consider a budget as being negative. It should be thought of as a plan to manage the finances and ultimately become financially independent.

Advantages of budgeting

The first thing that we are going to discuss is the budgeting advantages. These are the issues that you might even worry about in relation to budgeting. They’re probably more apparent, but we’ll just lay the groundwork on them.

If you’re really deep in debt, you might not think it’s even possible to retire early. But with the right planning almost anyone can say and maybe some changes in behavior.

Although budgeting won’t do all of that for you–spending is important–it’s the first step in many cases. Let’s take a look at some of the budgeting benefits and disadvantages. In doing so, you’ll see why budgeting is required, even though it’s not always great.

Getting your expenses under control

If you have a problem with spending, budgeting is probably the first thing to do in response. Seeing that the average credit card debt is  $6,741, per household, it is fair to say that many people will benefit from this.

Establishing a budget helps you understand where the money is going. Of course, if your expenses exceed your income significantly, you’ll need to make some changes. And some will consider such improvements easier than others.

Nonetheless, in many instances, making a budget would help you to recognize the expenditures without which you can do so. Hopefully, you will be able to get your expenditure more in line with your income by trimming the fat.

And that is the first advantage of budgeting: keeping control of your expenses. You want them to comply with your budget and you invest as much as you earn at the most.

Ideally, you ought to spend less than you earn. And that brings us to budgeting for the next benefit.

Increasing your savings rate

If you have spent any amount of time in the financial independence community, you may already know that a key part of financial independence is to increase your savings. If you haven’t even begun budgeting, that may seem like a pipe dream, but it is real.

How does that work, then? It is pretty simple (in theory, at least). Due to budgeting, you should have more money left over each month.

Sure, you could go on a nice trip or buy the new iPhone that you wanted, but that’s not the approach we take. See, budgeting is not intended to spend the extra money but instead to save it.

The further you run with it, the greater the savings rate will increase. If it seems unlikely, then it is not necessarily. Here are a few frugal tips on living to help you get there.

Analyze and understand your spending habits

Another budgeting advantage is understanding your spending habits. I have suggested this earlier. If you don’t keep a budget, and you just spend money as you see fit, you might not even know where your money goes.

You are forced to change that by budgeting. Instead of disappearing all your money into the abyss, you know exactly where it is all going.

It may not sound like a big deal, but it can be extremely beneficial to get your expenditures under control if you have that sense of clarity.

Disadvantages of Budgeting

Now that we’ve discussed some of the budgeting advantages, we’re going to be going over some of the budgeting disadvantages.

Some of us think this is a positive way of budgeting. This holds us accountable and organized. Others might see budgeting as a boring task that prevents us from having fun.

Some theories you have about (if any) budgeting, it’s true that budgeting has its drawbacks. Even though I’d find it a positive overall exercise, let’s look at some of the inconveniences.

Finding the method and making it work

Even after you’ve decided that a budget is required, it doesn’t just happen automatically to make it work. Actually there are numerous types of budgeting, so some trial and error may be needed.

It will rely on a variety of factors like your spending habits and income to find the right form of budgeting. This will affect your budgeting style particularly if your expenses are very different every month. The same happens if your salary is extremely fluctuating.

If that sounds like you, you might need a weekly budgeting process.

Stressing out when your budget gets too tight

Adapting to a budget-driven lifestyle means that at some point you inevitably run out of discretionary funds. In other words, even if you still have capital, it could be earmarked for something special.

This can often happen when you use budget envelopes that have cash to be used for the entire budget. Each envelope corresponds to a category (i.e. entertainment), and you can’t spend any more on that category if you run out of cash in an envelope.

And, you might just run out of money in some situations. Ideally, this is not the case, but if it does, it is a clear sign that you should prepare for a shorter period of time.

If you’re stressed because of these challenges, I recommend doing something that’s cheap–or better yet, free–for fun. Which could be board games with friends, a walk on your local trail or a picnic in the forest, depending on what you enjoy.

Being deliberate

Let’s say you’re eagerly waiting to get paid so you can buy a bunch of items you’ve wanted. Comfortable sound? If so, you’re not alone, but it’s not very frugal behavior.

Having never done so before, once you start budgeting, you will have to change this behavior. You can not spend your money any more as soon as you receive it.

That’s not to say of course you can’t spend money on wanting. Yet your spending will need to be more careful. This means planning for the future-in other words, budgeting.

It might be a bit of a change in attitude, but in the long run it’ll be worth this.

How to start saving

The first step in creating a budget is to track all your expenditure right down to the penny. This should cover both the fixed and variable costs. Fixed expenses would be your mortgage or rental payment, payment for your vehicle and any other payment that you are required to make each month. All of your other costs will vary as they would vary from week to week or from month to month.

The Rich Aren’t Always Rich

Whether you make $30,000 or $300,000 a year doesn’t show how well you do financially. People who don’t know how to budget will spend all their money, and possibly more. If the person who makes $300,000 spends $700,000 on holidays, homes, cars and gifts, he hasn’t made $300,000, he’s in debt for $400,000. He would pay a lot more than the initial $400,000 bill, because of interest.

The person with $30,000 a year lives in a small apartment, buys grocery stores instead of going out to eat, exercises at home instead of paying for a gym membership, spends time at the library with friends and can only save $100 a month. The person is more affluent than the person who makes $300,000.

The second person leads a modest lifestyle and saves money for her future. With the good behaviors she’s creating, her abilities are likely to grow stronger, and she’ll be able to increase her profits. She can increase her savings at that level, and her lifestyle, if she chooses. Continuing her good habits will make her performance multiply just as her savings will increase over time.

Sticking to that budget

When you find it hard to stick to your schedule, you can do several items that could make it easier. Many families have found themselves willing to transform budgeting into a game. We set goals for the week such as limiting their spending on grocery to $100, and then holding a celebration after achieving such goals. Family members could be given awards for coming up with the best ways to cut costs and remain on budget. And be sure to regularly reward yourself for keeping on target. There’s nothing to be glamorous about this. It might just be a movie family night.

Budgeting to greater savings

Spending less than you do determines your move toward financial independence and income. Even if you can save only a small amount, the traditions of saving grow with time to provide greater benefits. The degree to which you can save and raise your savings determines your path to financial security, or away from it.

So then, how are we saving? It seems simple: donate less than you’re making. But it’s not always easy. Focusing your focus on goal can be a challenge. To budget properly, focus your attention on where your money wants to go, and find out where it actually goes. Supervising your spending. Much of it is undoubtedly needless.

Start chopping up your expenses

Probably most critical step is to review each of your categories carefully, and start chopping. You will not be able to do much about your fixed expenses, of course, because they’re fixed, well. Any other group should however be open to reductions. You should easily be able to cut the amount of money that you spend on food, clothing and entertainment.

I’ve seen reports of where families could slash their food spending by as much as 50 percent simply by using coupons and taking advantage of special supermarket deals like BOGOs (buy one, get one). Simply eating less, going to less movies or staying away from those parties, you might be able to cut your entertainment expenses. And, believe it or not, you should even be able to cut your transport costs many days a week through ridesharing, carpooling or using public transport.

Put money aside for the monthly expenses. Know what to spend on rent, gas, electricity, grocery stores and other necessities. Set aside the money in envelopes, or a separate bank account. You will learn by budgeting this way which portions of your income are already committed to other items.

Divide your spending in the categories

If you know where your money is generally going, you need to decide exactly where it is going. You do this by making it split into groups. This could include transport, food, entertainment, medical expenses, clothes, transportation, lodging, debt repayment and last but not least, savings.

First, you should make savings plan. Indeed, savings are supposed to come before spending. Spend what you’ve left to save. If you do it the other way around you’re not going to save a thing. Operate in percentages, rather than currency. Therefore, if you spend 20 per cent of your paycheck on savings, keep that amount in the future. Instead, if you make more money, so too will the sum of your savings.

Saving to build greater wealth

If you get your spending under control, saving more than $100 a month shouldn’t be a problem. Even getting to a point where you could put $500 into an investment vehicle with a year-over-year 6 percent growth means you’d have nearly $500,000 after 30 years on. You can save more and make the opportunity behind these returns much better as your good practices carry over into the rest of your life, and you grow a stronger income.

The average person makes the mistake of seeing what they’re being paid and calling it their profits. You’ll know that not all the money’s for you. Make sure you know how much that money is in other people’s hands and how much you can plan on saving. Once you are in charge of your budget and prepared for growth, you’ll enjoy preparing what you’re going to commit to future independence and what you’re willing to spend on current experiences.


So, is that not the ultimate goal, at the end of the day? Indeed in the short term you may have to make sacrifices. But that will be much better for it in the long term.

In reality, budgeting has both advantages and disadvantages but it’s worth it at the end of the day.