Do you remember when you were a child how you'd preciously hold every little penny you were given and safely keep somewhere in your room? You would treat it as though it was your "precious"! You would collect and save it for something you loved very much (ice-cream when the ice-cream truck passed by your neighbourhood, your favorite candy, etc.). Back then, you were in touch with your money, you knew how to handle it, how to count it, you knew exactly how much was being spent and on what it was spent on, you knew how to take care of it, you were in charge of what was yours.
Today, everything in the current system is made to keep us far from our money. Our work pay is directed deposited in our bank accounts or we are handed pieces of paper called cheque, we have banks which take care of our money for us (these aren't necessarily a bad commodity), we have debit/credit cards. We don't have control over our money, really, since most of us don't even know where our money is going. We know that it's coming in, we know that our money goes out, but the big problem here is understanding where it goes, on what it is spent.
Financial freedom means understanding not just what comes in, but also what goes out; more importantly where the money goes. The third step to financial freedom according to Suze Orman is to take back charge of your money, to get back in touch with your money, just the way you did when you were a kid. It is time for you to face the truth honestly and know exactly where you stand today.
What you need to do ASAP:
- Grab a piece of paper or a notepad
- Assemble all documentation showing all your expenses from 2 years ago. Yes this might take a while, but it's worth it since it will be saving you so much more time and money in the future (for example for me, my bank sends me each month a computerized statement showing all my spendings and earnings/income. I am able to see where the money went, what I spent it on... almost like an x-ray!). These documents could include ATM statements, credit card bills, cancelled cheques, etc.
- Examine each dollar spent and divide the spendings into sections or categories (food, rent, utilities, gas, phone, cable, etc.)
- For each category, calculate the sum of how much, in the past two years, you have spent (the total of each area)
- Divide each category total by 24 (2 years). This will give you how much you spend on average per month.
- Now add up all the averages of each category together. This will tell you what costs you to live each month. Please keep in mind that these are averages. If your average total is $2,000, this means most months you'll spend less (maybe $800 or $1,200), but it also means that in some months you'll spend $4,000 or even $5,000. To get the more accurate average or to meet your monthly expenses, you need to calculate the average of each category each month.
- When you're done, calculate the total of the amount you have coming in (monthly paychecks after taxes, rental income if you own any real estate, pension income, social security income,etc.). Only calculate the amount of which you are sure will keep coming in. If you have loaned money to a friend and they haven't paid you back, do not count this. Write it all down. This is almost like the Robert Kiyosaki's CashFlow board game (understanding liabilities and assets). If you're familiar with it, you'll understand.
- Now it's time to match and compare your outgoing to your incoming cash. Now you know where you stand.
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