The Key to Financial Freedom

Trying to take control of your personal finances can be a real challenge. If you are like many people, you may think that the root of your financial problems is your income level. But frequently there are other factors in play which include poor money management skills, total financial illiteracy, and a lack of awareness of the problems that exist.

It may come as a surprise to learn that usually the amount of income a person earns has very little connection to how much that person spends or saves. A large majority of people live from paycheck to paycheck, stretching their earned income each month by taking on new debt in the form of credit card charges. If this sounds like the financial merry-go-round you are currently experiencing, no one has to tell you about the stress and worry that this lifestyle can cause... you are living it first-hand.

Financial freedom doesn't come easy. It usually means thinking about money in a totally different way. It requires a whole new mindset regarding saving- something many people do as an afterthought at best or not at all at worst. The one universal truth to achieving financial freedom is living below your means. If you can't spend less than you make, it won't matter how much you save, how much you earn, or how much you invest- you will never achieve financial independence.

Are You Living Above Your Means?

A lot of people naturally assume that if they just earned a bigger salary, their money problems would be over. But a big salary doesn't give you a license to spend. You only have to look at star athletes who signed multi-million dollar contracts only to end up bankrupt a few years down the road to realize that money comes with its own set of rewards and problems. It doesn't matter who you are or how much money you make, if you can't live below your means the end result is going to be the same- a financial downfall.

So how can you find out if you're living above your means? You may already have a suspicion that you are but the simplest way is to look at your credit card statements. Some good indicators are:

• Are you carrying large balances on all of your accounts?
• Do you have numerous cards which are all nearly maxed out?
• Are your balances going up each month?
• Do you only make minimum payments on your credit card accounts?

While these are all common symptoms of living over your means, your credit card statements don't tell the whole story. You need to know where your money is going. This means tracking your spending down to the smallest detail. It will take time and patience, but without knowing where your money is going you will never be able to create a workable budget. And without a realistic budget in place, living below your means is virtually impossible.

The Roadmap to Financial Freedom

So it should be apparent now that the key to becoming financially independent is really easy - spend less than you earn. If only it were that simple! We live in a consumer-driven society which encourages us to spend, spend, spend. If you can't afford it right now- buy it on credit. If you don't have enough cash- take out a loan. Unfortunately, that type of financial lifestyle isn't sustainable and eventually your debt will become overwhelming and unmanageable. At that point, you will be faced with some very hard financial choices.

The good news is it's never too early (or too late) to positively change your monetary habits. The following suggestions can help get you started on a smarter, more secure financial path.

• Determine your true income. You can't live below your means if you don't know what your means are. Go over your pay stubs and calculate your total net income for each pay period (every two weeks or monthly, for example). Your net income is how much you actually take home after all deductions have been made. Consider all other sources of income, if any. This could be alimony, child support, a second job. Arrive at a monthly total.
• Spend less than your monthly income. Hopefully you already have a realistic budget so you know what your monthly expenses are. If you don't- you need to formulate a budget and stick to it. Your goal is to have more money coming in each month than going out.
• Increase your income, if necessary. If you are truly living on a bare bone's budget and still come up short each month, you may need to find additional sources of income. You may have to look for a higher paying job or take on a second job, perhaps temporarily. You want to do everything humanly possible to make enough money to cover your necessary monthly expenses.
• Put the credit cards away. Unless you pay off the entire balance in full each month, credit cards should not be used as a way to make ends meet. Financial independence cannot be achieved by going deeper into debt.
• Stop trying to keep up with everybody. "All hat and no cattle". That's an old Texas saying used to describe people who give the appearance that they have a lot of money but really don't. Who wants to spend their life chasing after what everyone else supposedly has? The advertising industry spends billions every year trying to convince us that we can't live without a certain product - we won't be as popular, or successful, or happy unless we purchase it. Ignore the hype!
• Save for purchases. Don't think of credit cards as a way to get something you can't afford. The truth is if you can't pay cash for an item, you probably can't afford it anyway. Put money aside each month until you have however much you need. A bonus to this plan is you may decide you don't even want the item after waiting a few months. Impulse purchases can break a budget!
• Have an emergency fund. If saving money is a new concept for you, this may seem like an impossible task. But everyone needs an emergency fund for life's unexpected occurrences. Start small if you need to but get into the habit of putting money into this account every payday. Three to six months of living expenses is an ideal amount, but the most important thing is just to start. You don't want to have to take on new debt every time something out of the ordinary happens.