I am so excited that you want to take control of your finances! It really is a huge deal; most people are terrified at the thought of what it takes to reach financial freedom. The fact that you are taking a step towards it is awesome! Now let’s get started on your #journeytofinancialfreedom.
Money Route
Learning where your money needs to go compared to where it is actually going is a great start. Your money has no sense of direction and needs to be told where to go, otherwise it wanders and two days after payday you have no idea where any of it went. So how do we do it?
How to find out where your money is going?
Pull up and/or print out your bank statements from the previous month, both credit cards and debit cards. If you use the “for” sections of your cashapp/venmo pull those up as well. Create categories based on where you spend (i.e. groceries, gas, bills, eating out, beauty, etc.). Side note: Keep in mind that this will be tedious because it is your first time. There are systems you can put in place and apps you can connect your accounts to that will make this easier in the future. Add up the amount spent for each category. This number tells you how much money you spent on that specific category.
Once you have done this you can then turn the numbers into percentages by multiplying the category by 100 and then dividing that number by the total income for the month. This will give you the percentage of your income spent on the selected category. I personally like seeing percentages because it puts things into perspective a bit better. For example, finding out that you spent 75% of your income on eating out last month hits different than finding out you spent $400 eating out last month.
For those of you who like to use cash, keep your receipts and store them in sperate envelopes labeled for each category. At the end of the month, you can add the receipts from each envelope and complete the steps above.
Now that you know where your money is going, let’s find out where it should be going.
How to find out where you need your money to go?
For this portion you are going to write down all of your bills and expenses. For the items that remain the same each month (bills) simply write the name of the item, due date, and the amount you pay each month. For the items that fluctuate depending on how much you use/need (expenses) write what you usually pay. During this section include even the small things like subscriptions. Add all of these items up to determine how much your bills and expenses cost each month. Subtract this amount from your monthly income.
Find the direct deposits from your job in your bank statement. If you are on salary this will be easy since you get paid the same amount each month regardless of how many hours, you work. On the other hand, if you are receiving hourly pay the amount you bring in each month may vary. Write down the average amount you bring home per month. It is important to be realistic, don’t write down the amount you made that one pay period you worked 20 hours of overtime. You want to be as honest and accurate as possible with this.
Once you subtract your monthly bills/expenses from your monthly income you will be able to see how much money would be left if you paid all of your bills/expenses in full each month. Most people will be surprised to find that they actually have more money coming in than needs to go out, even if it is just a tad more. While it may not feel like you make enough to cover all of your bills, the good news is that you do. Now if you did this and ended up with a negative number this means that you do not make enough money to cover your bills/expenses and explains why you may feel like you’re drowning financially. There is no need to panic though, you are now aware, and awareness is the first step to change.
In our next post titled Tell Your Money Where to Go I will work with you on how you can alleviate the pain of living paycheck to paycheck as you continue your #journeytofinancialfreedom.
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