According to the U.S. Census Bureau’s 2018 Current Population Report, more than 40 million people live in poverty. I have to tell you that it is quite a large number. It makes more than 12% of the U.S. population.
However, there are a few steps you can take to help you avoid becoming one of the impoverished. The main skill for seeking your financial independence is to know your money and to know how to handle it, so here we go.
Income after tax.
Figure out how much money after-tax you actually make. It might seem a stupid step, but you would be surprised how many people do not know how much money they are making.
The easiest way is to check it on your paycheck. However, if you have set up auto deductions for 401 or 401K savings, or any kind of insurance, you should add those back, to give you the true picture.
If you work as a freelancer or doing other types of gigs, make sure to subtract taxes from this kind of income.
In short, after this step you want to have a number after-tax to Uncle Sam, but before any personal payments.
Setting up a budget
Here we are getting to probably one of the most important skills you will learn in life. The budget is a very personal thing, so I cannot tell you exactly how you should set it, but I can give you guidelines. You can adjust them according to your needs. So here is an example to budgeting your income:
- Necessities. It includes such expenses as food, housing, loans, insurance, transportation expenses. Generally, it takes around 50% of a person’s income, but it will vary depending on your income and other things
- Wants. It includes every expense you experience while having fun. Whether it would be going to a movie, buying some tool for your hobby, taking your significant other for a date, or just going to a local bar/pub for only one beer, it ends up in this category. It should make up to 20% of your income. You could go a bit lower, but make sure you are not taking it too low, as every person needs some time off to keep their brains in a good shape.
- Savings. Sooner or later in life, you, just like everybody else will have a rainy day. Or a rainy month. It is a good idea to put about 20% of your money into this category. Also, to protect yourself from accidental spending, you should further divide this category into the following:
- Long term savings. For example, apartment or house.
- Short term savings. Vacations, a new gaming phone, or a computer would fit this subcategory well.
- Unexpected expenses. It might happen that you end up in, let’s say a car crash and this subcategory should cover expenses that you might face for treatment, or fixing your car. In general, this is a “crap happens” subcategory.
- Investments. Unless you want to break your back working until your death, you should start investing about 10% of your money into various sectors that should generate you some return value without the need of your active labor. This is called generating passive income.
Whether it is some shady retirement fund, some real estate, or simple stocks, you should set some money for this thing. Although, you should make sure to invest not in financial operations, but also into your own education. Investments are a crucial step to your financial freedom.
To keep discipline, you need to track your expenses every now and then. You could use various online tools or apps, but good old notebook and pen, or excel spreadsheet work as well.
It is a good idea to automate your spending.
You could set up a bank account for each category and subcategory and set them up in a way that every time you receive some income, it is automatically divided and deposited into different accounts. This will protect you from “accidentally” spending your rent and insurance money on that new car accessory you have seen in the ad section today.
Keep in mind that the budget must be flexible just as much as your income are.
One day you will get a raise and will start receiving more income. You should adjust your budget for this change. For example, if you are getting $1000 a month now, your necessities are about $500, but if after one year you will be receiving $2000 a month, your necessities still will account for about $500, so in this case, you should decrease percentage of your necessities and add the remaining percent to other categories. Mainly investments.
Of course, budgeting your income is only the first step. Sometimes you just have an income problem instead of spending one. In that case, you should look into ways to make more money. But still, keeping these budgeting guidelines in mind, you will be able to achieve your financial independence easier and be able to forge your own destiny.