A few years ago, I remember being very excited when I moved out of my home and got my own apartment. However, my excitement soon vanished when I paid my first monthly bills.
Why?
Well, while I was contributing at home as well, I never realized that utility bills and simple daily expenses had the ability to drain my wallet like that.
Eventually, within just six months, I realized that I was not earning enough to support my lifestyle. Just when I thought about finding another job or returning home, I came across a podcast. This podcast became my knight in shining armor, helping me towards my financial freedom.
Today, I can gladly say that not only am I able to support my lifestyle, but I have a decent emergency fund, a small holiday fund, and even a retirement fund.
How did I get here?
Well, if you are also curious, keep reading. This write-up will cover all these details and much more.
Keep Track of Income
The very first step towards understanding your finances is to focus on your income streams and track them. Your goal should be to understand how much money you are earning, its source, and if there is a tax bracket.
Most people confuse the quoted pay with take-home salary, which eventually creates confusion.
If you are a beginner, don’t think about writing it down. Instead, it is better to use an application. The goal here is to start with a basic spreadsheet in Excel, where you do not have to work too much on understanding the sheet. However, money-tracking apps like Spendee, YNAB, EveryDollar, or Monefy can help you streamline your finances.
Track Expenses
Once you have the list of your income streams, it’s time to know how much money you need to maintain your lifestyle. Now, I know paying utility bills is the first step, so make sure to list these details. A key tip here is to either use a simple sheet or the same app you are using for income tracking.
Once you have the list of expenses, it’s time to look at simple ways to cut down your bills.
This might seem impossible, but comparing prices is one of the best ways to save money. For instance, internet is a common requirement for every household. Most people think there is no way to avoid or reduce the internet bill.
However, before you sign up for the plan or internet brand, it is better to start by comparing multiple internet service providers. This will not just help you save money, but will also help you get the best value out of your money.
Set a Goal
Now that you have the list of your income and expenses, it is time to set a goal. Your primary focus should be on setting a goal for saving or at least boosting your income to maintain a balance.
For instance, in my case, I wanted three main saving categories, i.e., for retirement, travel, and emergency. The main goal was to reduce the expenses by relying on technology and also making sure that each penny is used only when required.
Keep in mind that being ambitious might seem like a good idea at first. However, do not set unrealistic goals, since they only add to your disappointment, so make sure to keep things realistic.
Maintain a Balance Sheet
Now that you have income, expenses, and your goal, the next step is to maintain a balance sheet. Your sheet should not just have an outline of your monthly income and expenses, but also details about debt, loans, any investments, passive income, savings account, or 401(k).
Apart from this, your balance sheet must also contain occasional expenses like biannual insurances, a loan to a friend, a possible increment, or a small freelance project.
The balance sheet is especially crucial because most people might not have big earnings, but might have some passive income streams or some savings. It will also help in predicting the amount that can be saved or the maximum saving potential.
Automate Investment
Now that you have all the details ready, it is time to invest and save to the maximum. This step is quite important because it will determine your future as well.
In most cases, manual investment takes a lot of time and understanding. You need to not just learn and explore the profiles of the companies you are investing in, but also the ROI and profitability of the companies you are investing in.
Alternatively, there are apps to automate the investment process. For instance, apps like Mint, Foundersuite, Fidelity Investments, and Stock Rover are ideal for helping beginners invest their money.
Simply put, becoming financially literate is the first step towards financial freedom. The above-mentioned tips can help any beginner start their financial freedom journey in no time.
