Budget Example of Financial Freedom

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What does financial freedom look like?

Financial Freedom – What Is It?

Financial Freedom is about the liberty to chose without restraint. Since our finances are simply tools for us to use to meet our life’s goals, financial freedom is defined as having the attitude and resources to live abundantly in each stage of life, free of worry, to completely live out the full purpose of one’s life. Many people have heard about the concept of financial freedom, but what does it really look like? I mean, of course I want to be free to do what I want, free to enjoy myself and free to pursue my dreams. But beyond that, what is the big deal? Is it just about having some money?

Financial freedom goes far beyond having a few bucks. Sustainable financial freedom enables us to reach our potential as people. This freedom has five key components. Let’s take a look at those components and how they fit into your life

  1. VISION for how you want to invest your time, talents and money
    • Answer the questions: Why am I here? What am I passionate about? What does my life plan look like? The purpose of this Vision is not to rigidly plan your entire life, but to form a direction and plan of action to focus your efforts. Freedom to pursue one’s passions and goals is worth the effort to define one’s vision. How can you pursue your dreams when you don’t know what they are?
  2. PLAN (budget) that supports your vision and quality of life you want to maintain
    • There’s that dirty word, Budget. Don’t let it throw you. A budget is simply a plan for spending your money that is consistent with the vision you have for your life. If you make a budget and it doesn’t work for you, change it, but make sure it meets a couple criteria:
      • You live within your means: Only spend money you have
      • It includes your savings goals
  3. DEBT-FREE approach to everything we purchase
    • A debt-free approach doesn’t mean we NEVER use debt, but that we use money we have whenever we can and when we use debt, we prioritize the elimination of debt in our budget. A wise man once said: “The debtor is slave to the lender.” There’s no slavery in freedom.
  4. A bias toward SAVING
    • Savings must be a priority in your budget. How much do we need to be saving? Let’s start the conversation at around 15% of our take home pay. Why? Because we need to have three types of savings for future needs: We need an Emergency Fund for when life throws us a curveball. We need savings for Retirement and we need to be saving toward known future expenses, like cars, furniture, kids, etc. Adequate savings allows us freedom to act when we want to.
  5. An ATTITUDE of contentment with where you are, and gratitude for what you have
    • Don’t compare yourself to anyone else, but be content with where you are. Contentment brings peace and peace is a large component of freedom. Gratitude focuses our mind on what we have instead of focusing on what we do not have. Be grateful, always.
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The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

 

Budget Example Of Financial Freedom

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The budget of the financially free can take many forms, but whatever the form, they all have these common traits:

  • They spend less than they have.
  • They account for saving toward goals
  • They eliminate debt

Let’s take a look at a very good actual budget that allows for financial freedom. Note: The budget is shown as a percentage of Net Spendable Income (NSI). NSI is your total income, minus taxes and charitable giving, usually represented on a monthly basis.

Category                              Budgeted $            Includes                                                                         

Housing                                    25% of NSI           Includes rent/mortgage, taxes, insurance, HOA

Utilities                                       5%                        Electricity, water, gas, trash, internet

Autos                                         14%                        Car payment, insurance, gas, repairs

Food                                           12%                       Groceries, toiletries, beauty items, eating out

Insurance                                   2%                        Life insurance

Medical                                       2%                        Medical costs and insurance

Retirement Savings                12%                      401K plus company match of 3%, totaling 15%

Savings for upcoming needs  10%                    Saving for new car, furniture, house repairs

Kid’s college savings                  5%                    529 plan

Entertainment/Clothing           5%                    Clothes, gifts, pets,  misc.

Vacation                                         8%                    Fun in the sun!

Total:                                           100% of NSI

This is a very good budget, with ample savings, (totaling 27% of NSI) and no consumer debt. This budget is sustainable and takes care of the family’s goals, namely:

  • Saving aggressively for retirement
  • Saving for the kids to go to college
  • Saving for new cars, furniture and house repairs
  • Funding for vacations and living life (entertainment, etc)
  • Funding for security: medical insurance and life insurance

Does every budget need to look like this one? Absolutely not. Each budget should reflect the goals and priorities of the person or family. But every budget must make room for savings, must eliminate debt and must never allow expenses to exceed income in order for it to be sustainable. And a  sustainable budget is a large part of the puzzle to live financially free in order to live abundantly in each stage of life, free of worry, and free to live out the full purpose of one’s life.

Last chance for great savings on one of the best budgeting books on the market!

The Total Money Makeover: Classic Edition: A Proven Plan for Financial Fitness

FREE123: Freedom In Less – Spring Break Update

Freedom in Less

FREE123: Freedom In Less” is my personal account of pursuing financial freedom by pursuing less: Less stuff, less complexity and less spending. The purpose is not deprivation, but to achieve more financial goals while experiencing contentment and purpose. Take a look:

Less Is More – The Beginning

This series got started one day when I was daydreaming one day about my happy place and how I feel when I am there. For me that place is Kauai Hawaii, on a beach, with a 84 degree sunny day (every day seems 84 degrees and sunny to me there). When I am there, just experiencing the beauty, I am content, happy, joyful and grateful. To say the least, when I am there, I want nothing else. It is simple and I am content. Then I got to thinking: Why can’t I experience that simplicity and contentment more often? Like at home? In my everyday life? The answer is I can. And a simple contented life would greatly enhance my goal of financial freedom.

The Goal: Purposeful Simplification

For this season in life, I am going to purposefully simplify my life by finding freedom in less. Less stuff, less complexity and less spending as a means to reaching my financial freedom goals and find more contentment and purpose. The goal is to live more purposefully, a frugal budget with clear goals and a renewed focus on reducing consumption to achieve more contentment and true freedom.

Spring Break Update

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This month my wife and I took a vacation with a simple focus. Enjoy the natural beauty of the island (St. Croix) and immerse ourselves in the people, food and authentic culture with little to no tourist activity. In other words, live in the moment like the native islanders do, spending lots of time enjoying the simple pleasures. We did this for three reasons: First, we needed to slow down and recharge. Second, this is probably the only time we will ever visit this island so we wanted an authentic experience. Third, and most of all, we wanted to simplify the vacation to relax and enjoy simple things like laughing, resting and eating together. We had a blast! Take a look at some of the “Less Is More” decisions we made:

  • We rented a small little cottage (AirBnB) owned by a local artist to give us a feel of what is was like to live like the locals. No air conditioning, pool or cable TV. Instead we enjoyed the simple sounds of the island through our open windows that allowed the trade winds to blow through the cottage. It was amazing. So simple and enjoyable.
  • We rented a car and made it a point each day to go to the local beaches, food stands and watering holes and we met so many interesting and enjoyable people who ended up sharing the week with us. There is nothing like having locals take you to the best (secret) places. And we made fast friends.
  • We kept it real simple. No schedules, no large groups, no long lines. We hiked, swam, walked beaches, searched for sea glass and snorkeled. Easy, fun and very inexpensive. Any we also got a little exercise!
  • We depended upon, and benefited from only using recommendations from locals. As a result, every experience was amazing and extremely inexpensive, like free!

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FREE123: Freedom In Less Summary

This month we experienced a “Less Is More” vacation in St. Croix. We decided to simplify and live in the moment on this vacation in order to slow down and spend less. Really, to vacation in a less-is-more style by doing/spending less and enjoying time together more. It was great! The things we did do were memorable and really felt special. The extra time we just hung out together was awesome and restful. And the laughs were endless. By limiting events/activities and excessive vacation spending, we didn’t break the bank and yet enjoyed the most important things: time with friends and shared experiences.

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The Working Backwards Series: How Much Savings Can I Afford?

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The Working Backwards Series?

The Working Backwards Series takes a look at budgeting in each spending category from the standpoint of “how much can I afford given our income, lifestyle and choices?” In this case,  we are talking about a family of four living in Austin, Texas, working toward living in financial freedom, and making $74,000 a year (the average household income in Austin).

To see more from the Working Backwards Series, read this previous Working Backward Series post:  Working Backwards SeriesHow Much Auto Can I Afford? 

Topic For This Post: Savings

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It sounds funny doesn’t it? How much savings can I afford in my budget? The fact is that most Americans try to save money AFTER they have paid all their bills and come up woefully short of their savings goals. A better way to save is to budget savings in your spending plan each month to ensure our savings goals are met.

“Those who understand financial freedom learn to save first, then spend what is left.”

Let’s start with a couple assumptions. Let’s assume we are living on a balanced budget (spending less than you earn) and earn about $74,000 a year, which is the average household income in Austin Texas. Let’s also assume that we are a family of four, with dual incomes and just getting started with our savings.  In this scenario, most families can afford up to about 15% of their NSB to go towards savings and investments. 

What Does The Budget Look Like – The Math

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A $74,000/year household income equates to roughly $54,750/year after taxes and charitable donations, or $4,563/month. At 15% of our budget going to savings and investments, that’s roughly $685/month for savings or, $8,220/year.  Let’s take a look at our budget  to see if we can meet our balanced budget objective:

Budget (% of Net Spendable Budget by category)

Housing (All Expenses)           30%

Autos                                              14%

Food                                                 12%

Insurance                                         4%

Medical                                             2%

Debt Service                                     5%

Savings/Investments                   15%

Entertainment                                5%

Clothing/Shoes                               5%

Vacation                                            8%

Total:                                           100% of Net Spendable Budget (NSB)

So from a budgeting standpoint, we can make a balanced budget with 15% of Net Spendable Budget going toward savings and investments, without jeopardizing important budget items like housing, autos or food.

But What Are We Saving For?

What are we saving for? Why is it important to dedicate an entire 15% of our monthly budget to savings? It helps to know why we are socking money away each week. It motivates us to keep going when life’s obstacles or temptation gets in our way. That new pair of shoes. That incredible new car deal. That opportunity to travel the world on a whim. All of these situations vie for our precious dollars so it helps to list, specifically, what we are saving for. Here are the top four reasons to save money in our budget.

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Emergency Fund

First and foremost is an emergency fund. This is money set aside for true emergencies. An emergency fund is the number one way to keep out of debt. The most successful people I know have the rules written out that both define what an emergency is and how much can be used toward that end. Emergency to me means something that threatens my family, my health or my method of providing for my family. Nothing else.

How much emergency fund is enough? Where do I keep my emergency fund? These are both good questions and the right answers depend on the temperament and situation of the family in question. Most pundits agree that somewhere between three months and twelve months of expenses is the right range for an emergency fund, depending on your risk adverseness. Location of the emergency fund can be anywhere from inside your mattress to secure investments, but key to the location is that the money needs to be accessible and have low risk of losing its value. When you have an emergency, the money must be there.

What does saving an Emergency Fund, (EF),  look like? Since we are just starting out, we want to get $1,000 in the EF immediately and then at a slower pace, build the EF up to 3 to 6 months of savings. So, in month 1, all $685 of savings will go the the EF and most of month 2’s savings as well to get to $1,000. Then we will put $300/month into the EF each month thereafter.

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Retirement Savings

The second reason to save is for retirement. There are many theories about how much and where you should save for retirement but the fact remains that we must prepare for life after full time work and/or old age. It is not our children’s responsibility to take care of us when we are old but our own. How much do we save? As a general rule, target 25 times your annual expenses as the amount you want for retirement. And though this amount varies for each individual, there are some smart rules to follow:

  1. Start saving for retirement early, letting compounding help you meet your number.
  2. Take advantage of tax preferred accounts like 401K, SEP and IRA accounts to minimize taxes
  3. Take advantage of employer matching plans and/or other employer retirement benefits

Practically, what does that look like each month? In month’s 1 and 2, all money essentially goes into the emergency fund to build it up to the $1,000 minimum. After that, we will put in 3% ($137) of our NSB into a retirement plan (401K) along with the employer’s match of 2% ($92) for a total of 5% of NSB or $228/month.

images-3Generational Savings

For those raising families or expecting to raise families, we need to be saving for known children expenses, including school, marriage, cars and other events (think prom, field trips, etc) that are assumed to occur. For most of us, this can be done over many years so a slow and steady savings can meet your needs. Why not start savings accounts for each child on the day they are born? I recommend putting $75/month aside for each child from birth. In this example, we have two kids, so that’s $150/month. It’s easy, and by using auto-drafts between my bank and investment accounts, I don’t even see or feel the money leaving my account. Where should we save this money? 529 Plans come to mind for college savings. An Index Mutual Fund or ETF can work for other needs. But they should be separate from our day-to-day funds and take advantage of tax preferred accounts if we know the money will be used for higher education.

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Short Term Life Savings

Life happens and it can be expensive. All of us have autos, furniture, appliances and other items that wear out or need upgrading over time. We need to be saving for these eventualities. Since these savings are short term in nature, less than 10 years, the money needs to be invested in something that is safe but hopefully returns more than the cost of inflation. Maybe a safe low cost, low turnover mutual fund or an ETF. Saving $100/month in an index mutual fund allows me to have money available when we need it for new purchases to replace old or worn-out items.

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Total It All Up

What are we looking at when it comes to savings as a percentage of net income? When you add it all up, it really is around 15% of our net pay. Wow! Some people even suggest it should be much higher but with two children, we will settle of 15% for now.

The point is that a balanced budget for a family of four on an average household income and with many essential budget categories like housing, auto, children’s needs, etc, does not have much room for savings but we MUST save in order to meet our long term goals and dreams. Plain and simple. While most of American families try to save AFTER they pay all their bills, that method rarely works because there is rarely money left over. In fact,  I believe that trying to save money after bills are paid is one of the major reasons we have more than 75% of households in America living paycheck to paycheck with no savings for emergencies, retirement, college (for the kids) or any money for dreams like vacations or special events (think weddings or cars).

What’s The Solution

Savings must be a part of the monthly family budget. Savings is as important as the rent, food or the auto payments. Why? Because savings (which can be placed in investments) can generate the wealth needed to fulfill goals and dreams. Want to retire some day? Savings is the answer. Want to send your kids to college? Savings is the key. Want to stay out of debt? Saving, in the way of an emergency fund, is the only way to prevent credit card debt when (not if) an emergency occurs. It looks like this:

Emergency fund: $300/month

Retirement: $137/month plus $92/month in company match – Total: $229

Children’s Savings: $150/month

Short Term Needs Savings: $100

Grand total: $779/month including company match on the retirement savings

Many successful personal finance individuals like to turn the savings and spending relationship around. Instead of trying to save what’s left after spending, they say they like to spend what’s left after saving!

Final Word

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Living in financial freedom does not allow for families to try and save money from what’s left after spending. It requires us to budget savings along with other important budget categories to ensure savings occurs each month.  Today, we found that a family of four, living on an average Austin household budget can afford to save about $685 per month and save in four broad categories: Emergency Fund, Retirement Savings, Generational Savings and Short Term Life Savings.

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While many times we go to the credit card to stretch our spending, going into debt because we have no savings is not the answer. Fight to be credit card debt free. Live on a budget and use cash or a debit card. Some people have the discipline to use their credit card and immediately pay it off, essentially making it like a debit card. Work hard to be patient and only spend money that you have instead of using the credit card company’s money. The temporary enjoyment of buying food or eating out with credit is short lived compared to the lengthy process of paying off the debt. If you must use your credit card and develop a balance in your account. Strive to pay it off quickly so that the exception (credit card debt) does not become the rule. Financial freedom is not easy, but it is worth it.

“The faces all around me they don’t smile they just crack
Waiting for our ship to come but our ships not coming back
We do our time like pennies in a jar
What are we saving for”

(Believe by The Bravery)