Income & Expenses; first step to obtaining financial freedom
How to quantify financial freedom? What does financial freedom really mean? By mastering income and expenses, it will tell you
“If you cannot manage small money, you won’t be able to manage big money.”
This quote hit me to the core. I tell myself I really want to be rich, not work for money, be able to do whatever I want whenever I want, and never have to worry about money because I have so much of it.
In order to have money work for me, I need to learn how to manage it. If I receive as small as $100 and I spent it all right away, how am I going to receive a million and expect to keep it?
If I cannot manage small money, how I am going to manage big money and achieve my dreams?
Financial freedom is simply spending less (expenses) than the amount you make (income). Once the income is earned passively, I know I have reach financial freedom
Knowing this and understanding this quote started my financial journey of managing my income and expenses.
Income & Expenses
- Income is simply whatever money puts money in my bank account.
- Expenses are simply whatever took money out.
By tracking and knowing how much I earn and spend and how much I have left over to save and invest is how to manage money.
This is simply managing cash flow like spending and saving, depositing and withdrawing, assets and liabilities. All the same thing but spelled differently.
To manage this, I use a Google Spreadsheet Tracker. In my tracker, I record once as the end of every month and takes me less than 10 minutes a month to get on top of my finances and manage my money.
The first section is Income — what are all the ways I am making money and putting money into my bank account? Typically it is my job, and any passive investment or interest I get from a bank.
The second section is the expense. Whatever is taking money out of my bank account. And I take the time to think of categories of expenses that I tend to spend money on every month so I can track it and visually see where I am spending my money.
My expense category includes rent/mortgage, grocery, entertainment, transportation, health, education, donation, etc. This list can go on and get as detailed as I would like.
It is important to track expenses because we can use these to calculate what financial freedom mean to you. Everyone’s financial freedom goals and lifestyle are different, someone who likes to go to fancy restaurants and buy luxury accessories financial freedom goal is much different than someone who enjoys traveling, going outside, and socializing and even more different for someone who enjoys reading a book, spending time in outdoors in nature and cooking at home.
How to calculate financial freedom
By tracking our expenses, we can calculate and track how much we spend every month and if we do this consistently enough, we can track how much we spend yearly.
Do this over several years and we get an average of how much we spend and then we can take that multiplied by 25 which means how much I would need to be financially free. 25 because typically average investing is 4% on balance so we would live off the interest and investment money that it produces.
I will share my tracker here which is an excel spreadsheet taking tracks income and expenses in all different types of categories over a year.
Doing this also helps me check my bank account frequently in case of any unusual charges like random bank fees. I always catch them cause of this.
Another way to track income and expenses:
Alternatively, you can use apps that hook up to your bank account and tells you and categorize all the income and expenses for you like Mint.
I downloaded and tried it but it does not provide me the customization I need which is why I prefer creating my own tracker. At least for me, during the time of writing this, these apps do not allow me to alter an expense, let's say if I shop at a pharmacy but I bought a gift, I want to label that as entertainment instead of health. These apps so restricting.
I am all about data privacy and I do not want to share my credential and data with another company because I have no idea who has access to it on the other side and what they do with the information. Fewer people I give access to my bank vault, the better.
“Be a Slave to Money or Money a Slave to You”
Conclusion + Activity
Go ahead and get started with tracking your income and expenses.
Do not just think about it conceptually. I promise you by actually sitting down and writing it out to see visually how much you actually make and spend will give you a different perspective. I thought I made way more than I actually spend it was the complete opposite until I saw it in front of me.
Whether you use the tracker I am using, or use one of the iPhone apps, or create your own tracker, or write it down on paper. Track all money coming into your life and track all the money that is spent. Do this over the course of at least 12 months and calculate your financial freedom goal (multiply your annual expenses by 25).
Good luck!
This blog is a part of a series of articles I am writing on “Everything I Know About Money”. This is [Stage 3: Managing]: Income and Expenses. You can find the full blog below:
