A Budget for Financial Freedom

Calculating an appropriate level of monthly expenses can be confusing. I think this is a result of personal finance not being part of the traditional education curriculum.  There are many online calculators out there that will tell you what you “should” spend on your monthly expenses. The problem with these online calculators is that they calculate your expense budget in order to just get by in life, but never reach financial freedom. This blog is not for people who just want to get by in life; it’s for people who want a plan to accumulate an extraordinary amount of wealth regardless of how much you make.

If you want to get ahead in life, and I mean true financial security, you are going to have to change the way you think about money and your monthly budget. If you are saving the traditional rule of thumb of 10% or 15% of your income, you are essentially gambling with your future.

When reading the following percentages, you might be thinking to yourself, “How is this even possible?” I would answer this question by telling you that you need to shift your paradigm. “Sacrifices” are necessary if you want to take control of your financial health. And I put sacrifices in quotations, because the benefits of taking control of your finances far outweigh the sacrifices. Not only that, you can learn to live a fulfilling life even if you save a substantial amount of your income.

Categorizing every dollar spent is tedious and time consuming and since time is money, I choose not to do that. Below is a framework of the maximum amount you should be spending on recurring, monthly expenses. Because taxes vary greatly from person to person, these percentages are based on your take-home pay:

Housing – 20%

The biggest drain on your wallet right now is rent or a mortgage payment. Goal #1 for anybody looking to take control of their financial future is to slash their biggest expense (besides taxes)– their housing payment. You should not be spending more the 20% of your net pay on rent or a mortgage. The biggest mistake I see people making is spending too much on rent/mortgage, often stealing 40%-50% of one’s income. Not only is this a huge drain on your bank account, it’s often a big source of stress for people. If your take home pay is $2,000 per month, the max you should spend on rent is $400 per month. If your take home pay is $5,000 per month, your max would be $1,000 per month. And so on. Billionaire Mark Cuban found a way to pay only $125 per month on rent in his 20s to build up his capital, so you can too. Get a roommate, or multiple roommates in order to get your housing expense under control.

Savings for Investing – 35%

This is the most important category. When you slash your housing payment, you instantly become much more cash rich. Don’t get caught in the trap of thinking you can now spend more on frivolous items. When making that sacrifice of getting a roommate or renting out a room in your house, make sure you are putting that money to good use. While saving in order to invest is technically not an expense, you should treat it as such. What I mean by that is, treat your predetermined amount of savings every month as if it is a bill that must be paid. I would suggest opening up an account that is separate from your checking account, so you ensure you will not spend your savings. Every time you get paid, whether it’s weekly, bi-monthly, monthly, etc., you should set up an automatic transfer of funds into this separate account. This will make you more disciplined, and seeing your account increase will make you happy as you move closer to financial security. If you can save 35% of your net pay every month, there’s no need to read any further because this is the ultimate goal.

One thing to note: you are going to have to invest your savings once you start accumulating cash. Otherwise, your savings will be eaten up by inflation. The purpose of this blog is not give advice on how to invest, but please see my resources page for a few of my investment mentors.

Entertainment / Car / Insurance / Food / Cell Phone / Charity / Etc. – 45%

As mentioned above, I do not recommend categorizing every little monthly expense because this turns budgeting into a tedious task. For this reason, I personally lump all non-housing and non-savings expenses into one category in order to help keep my mental sanity. My girlfriend, however, has about 20 different categories in her budget which I think is completely ridiculous. If you want to maximize your time, I suggest you follow my simple categorization method, I’m all about simplicity in life. And to re-emphasize, if you are able to save 35% of your net pay and are still able to live your life how you like, it doesn’t really matter where you are spending the rest of your money. You are on the right track to financial freedom.

Conclusion

If you aren’t in the position to save 35% of your net pay, do not get discouraged by thinking “oh well I can’t save 35% so why save at all?” Instead let that motivate you to save as much as you can until you can reach the 35% which I know you will. It’s critical to start setting goals to get to that 35% number. If you are at 5% right now, I recommend increasing your savings by 5% every month and you’ll get there in just 6 months, and your incremental sacrifices will be hardly noticeable. You can get there and the fact that you are reading my post, proves that you have the motivation to do what it takes to achieve financial freedom.

3 thoughts on “A Budget for Financial Freedom

  1. Hi Jeremy,
    Congrats on getting your CPA. I agree in theory with everything you say. In practice, Southern California rent & mortgages in the price range you suggest would put a person living in Compton or 90 miles inland, so not very practical for young families living and working in the South Bay. Otherwise, good advice!

    Like

    1. Hi Bill,

      Thank you for commenting. You bring up a good point regarding the cost of housing in Southern California, especially for young families. If you are single, a great way to cut the cost of high rent is to rent out a room in a home. In Irvine, you can do that for $500-$700 per month, and that is in one of the safest cities in the US, in an area with an abundance of jobs AND a stable economy. If you are not single and/or renting out a room is not possible, I’d recommend saving 35% of your income until you have a large enough down payment for a home so your mortgage does not exceed ~20% of your pay. This might take several years, possibly even a decade, but it will pay off financially and emotionally in life.

      Like

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