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  • Nate Carter

Five Steps to a Financial Freedom Budget

Learn the Tools to Track Spending and Build Passive Income


Almost 80% of workers live paycheck to paycheck. The key to ending such reliance on a paycheck is narrowing down how much you really need each month to live on. A monthly budget must cover all the traditional expenses like utility bills, groceries, mortgage, and property taxes, while also setting aside money for bigger ticket items like vacations, a new roof, and college savings for kids. The only way to know your monthly spending number is by analyzing the data. Below are five steps to building a sustainable budget for financial freedom.


1. Accurately Track Spending: You need to know exactly how much you spend each month. You cannot guess and you also need to track every dollar. Fortunately there are several online budget tools such as YNAB and Mint that make it easy to track spending. The key to being successful at this is to be consistent in tracking all spending, if you miss some spending, you will be working from flawed data. The easier it is to track the data the more likely you will be to stay with stick with the plan, so pick a budgeting tool you like.


2. Tracking Leads to Less Spending: People who track their spending are often surprised at how much money disappears from unnecessary or impulsive purchases. Frequently eating meals out or ordering in food, monthly subscription services, and $5 coffees are common culprits for overspending. The mere process of tracking spending almost always leads to spending less. You will become more conscious of each purchase. Another trick is to think about purchases in terms of how many hours of work they require. This works best if you calculate what you earn per hour at an after tax hourly rate. Once you know this number you can ask yourself is the purchase is worth the number of hours of work required to get it.


For example if your after tax rate hourly income rate is $20, then dinner out for $100 is five hours worth of work. A $200 coat is ten hours at work and $30,000 car is 1,500 hours or nearly 38 weeks at work. You can then decide if that trade in working time is worth the purchase.


3. Make Sustainable Cuts and Create Value: The key to reducing spending is to through sustainable cuts. Your budget is not a short-term financial diet, it is a about reducing your spending in a way that you can live with over the long term. One strategy is to begin skipping certain items for a month, if you don't miss it, you don't need it. Also a cheaper option may do the job. A $50,000 car and a $25,000 car with both get you to work. Once option just costs twice the price. This process of making sustainable cuts to your spending is not only about letting things go it is also about finding ways to create value:

  • Calling your insurance company and their competitors can lead to finding the same coverage at a lower rate or raising your deductible can significantly cut the cost of your coverage;

  • Being a volunteer firefighter for a certain number of hours each month can lead to earning tax credits in certain States;

  • Having an energy audit can cut your energy bill as can installing new insulation or LED lighting;

  • Bringing your lunch to work can save you thousands each year;

  • The moving packet at the post office has a 10% discount coupon for major home improvement stores which can save you $50 to $100 when buying new appliances;

  • Merely delaying a major purchase by a few weeks may lead you to realize it is not necessary or a used option would suffice.


4. Your Monthly Income Goal: After several months, you will begin to see your spending fall into a set range which makes it easier to set a specific monthly spending goal. Remember your budget includes setting aside reserves for expected bigger expenses such as new tires for the car, a new HVAC system, or braces for the kids. Track any surprise expenses that emerge and add them to your list so you can account for them in the future.


Don't Forget Inflation:

If you find after several months that you are spending $4,000 per month you can start to include inflation into your monthly expenses. Monthly income should climb by about 3% each year to give you the same purchasing power year after year. For this example you will need $4,000 per month this year and $4,120 ($4,000 x .03) per month next year and $4,243.60 ($4,120 x .03) per month in year three. This calculation ensures that your money has the same purchasing power in future years.


5. Turn Savings into Passive Income Streams: After a year or two you will have a very accurate inflation adjusted monthly budget. As you adhere to this budget the money you save can be invested to create passive income streams. Over time more and more of your monthly budget will be covered by this passive income. If any surprise expenses emerge, don't rely on your regular day job to cover the costs, look for creative way to generate new income to address this emergency. An unanticipated $1,000 bill can be covered with a short term job at a retail store during the holidays or working part-time as a tax professional during tax season, or doing some consulting work on the side.


You can even start a little enterprise shoveling driveways or mowing lawns with your kids to show to take an entrepreneurial approach to solving financial challenges while letting them share in the profits. The goal is to get you to look for new opportunities to create wealth instead of relying on your traditional job when a financial emergency occurs.


Make Progress Every Day In Building Passive Income:


By following this strategy your passive income will increase over time until it eventually covers your monthly expenses. This is a major step towards financial freedom as 100% of the income from your job can be saved. You also have the luxury of changing jobs if you want or you could consider taking some time off from working. Financial freedom creates options for what you can do with your time. For information on how to build a passive income portfolio see 12 Types of Passive Income for Financial Freedom. This is also covered in detail in the book Become Loaded for Life.

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