You will hear me say many times ‘Empowering Women Monthly’ ~ which was the origins of The Women’s Inner Circle
Why a Financial Freedom Plan?
You may ask yourself the question – why do I need to do this? Most women are not used to budgeting – we may tend to be impulsive and end up with a list of needs at the end of the month with no money left to cover them. “Too much month left at the end of the money” syndrome and obviously no involvement in the “financial planning process.”
The only way to make your dreams real is to take control of your income and spending.
A budget makes you feel good when you achieve your goals.
A budget is your ally to making your dreams come true.
A budget reduces stress as you get out of debt.
As soon as you understand a budget as a positive part of your life, you will gain mastery over your money and become more involved in your personal “financial planning process.”
Financial Freedom Plan Instead of Budget
With that said, for the purpose of attaching a positive connotation to the word budget, I’m going to change the name to Financial Freedom Plan.
Parts of Your Financial Freedom Plan
A Financial Freedom Plan has two basic parts. Income is all the money that comes in. Expenses are all the money that goes out.
When you make a plan, you make sure that your income is enough for your expenses. If they don’t balance, you need more income or fewer expenses – strategies and tactics for each of these are available (feel free to email me for help).
Income
Income is all the money that comes into your accounts. Generally, there are three types of income.
- Active Income
- Passive or “pre”earned Income
- Portfolio Income
Active income is common and obvious. You trade your time for dollars. If you get a paycheck, this is active/earned income.
Passive income is income that you’ve previously invested time or money in building, and doesn’t trade your present time for money. Passive income can come in different forms but for the process of creating a financial freedom plan, think of passive income as money that comes in without your present effort.
Portfolio income is all the money that comes from your investments.
The First Part of Your Financial Freedom Plan
The first part of a financial freedom plan is listing all the money that you can expect to receive. Remember that some payments may only come a few times a year. Calculate what your average monthly income is by taking your total for the year and dividing it by 12.
If you work for someone, begin with your after-tax income. That’s your gross pay minus any wage-based taxes, such as withheld income tax, Social Security and Medicare taxes, and disability taxes. If your employer deducts other expenses from your paycheck, such as 401k contributions, health insurance premiums and union dues, add those back into your net pay to get your after-tax income.
Estimate your income on the low side. If you have extra, you will be pleasantly surprised.
The Other Side of Your Financial Freedom Plan
Expenses
Expenses are all the payments, bills and expenses that make money leave your accounts.
And of course, when you make a Financial Freedom Plan, your expenses get a long, hard look.
Expenses force you to take an honest look at your life.
Questions to Ask for Your Financial Freedom Plan
What do you really need?
There is no one-size-fits all answer.
Everyone needs food, but do you need fast food or would a home cooked meal be just as good?
Everyone needs clothing, but do you need designer clothes?
These are hard questions to answer because “need” is so undefined. We fool ourselves into thinking we “need” a lot of things.
But it’s easy to convince yourself this is true when maybe, it’s not as important as you think.
If this wasn’t confusing enough, what you “need” can change based on your circumstances.
There is no one answer about what you really need. It is based on your personality, your lifestyle, and your personal and family needs.
How do you decide what you need?
Start with a list of what you already spend. Look at the expenses which would be the easiest for you to reduce or give up. Don’t forget to include expenses like taxes, which may be reduced if you manage your money better.
I would encourage you to start keeping a Spending Journal.
Every time you spend any money – whether it is by cash, debit card, check, credit card, automatic from your bank account – write down the date, the amount spent and what it was for.
This will be of tremendous use to you for not only setting up your spending/expense categories but will force you to take a good hard look at where your money is going.
Setting up your expense list:
I had first set up a list of monthly expenses and even though , as my financial advisor told me, I included more information than most, boy did I miss a lot. You need to be specific if you are going to do an accurate accounting for your financial planning process.
I’ve broken the Financial Freedom Plan up into thirteen categories. If I missed something, I do apologize up front and will welcome your suggestions!
This is pretty comprehensive – you will fill in the categories that fit you and your lifestyle. Stay focused on your goal – being involved and responsible in your financial planning process.
Categories
1. Let’s start with with the roof over your head – rent, mortgage, home owners association, maintenance …. any expense that would correlate with housing expense. Putting a little away each month for taxes and maintenance will keep it more manageable for you, and it won’t seem so overwhelming.
2. The Insurance category should encompass insurances for your person as well as your home.
3. Transportation
4. Utilities
5. The Medical category will cover what your health insurance won’t cover ie. dental, optometry, etc.
6. Personal Care takes in everything from your head to your toes including clothing, dry cleaning, classes and religious affiliation dues and expenses, etc.
7. Pet Care can be expensive so if you put this in your plan and save you won’t get caught unaware and short. I found this out very quickly this year when Cookie was in the hospital for 7 days!
8. Debt Service may or may not apply to you.
9. Entertainment needs to be planned for. All work and no play is no good and You need to be “nice to you.” Yup- entertainment needs to be included in your financial planning process. A Happier You will be someone who will stick to their budget.
10. I feel very strongly about being charitable so have included Charity as an area to plan for in the financial planning process.
11. Investments involve planning for your and your family’s future and are crucial in the financial planning process.
12. Home Improvements take into account all that will be needed to keep your home up-to-date. Very important as real estate is a critical component in expenses.the financial planning process.
13. Child/GrandChild Care may or not apply to you. If this does apply be sure to budget because these expenses can add up very quickly.
Now that I’ve given you the beginning steps to budget and plan for, think how happy you would be to actually have a little extra money at the end of the month/year.
Decide at what point you can take those extra dollars and apply them to a “want” instead of a need. It’s always good to make up a list of wants as well and if you can, save for them too – important for your financial planning process.
The Financial Freedom Plan is an Ongoing Process
The financial freedom plan process is on-going. Rarely will you make a plan and find that you don’t have to come back to it. Over time, the price of things change and you may need to shift your expense allotments for different categories. If you get stuck trying to reduce your expenses, I have lots of ideas for you.
Holli@HolliRovenger.com If you need help, please do not hesitate to ask. I’ll be happy to set up a consultation with you. I can help you with ways to increase your income, and ways to decrease your expenses.
Much more information can be found to help you in The Simple and Sassy Guide to Financial Empowerment
I’ve also developed a Financial Freedom Plan Spreadsheet to help you. It’s called The Ultimate Budget Form Spreadsheet which you can get for yourself here.
You can read more about Strategic Financial Planning here.