Most people think the best way to become financially free is to make more money. Although more money can help, how you manage money is the real indicator of whether you will ever achieve true financial freedom.
The Key to Financial Freedom
There’s a lot of financial advice out there. Most of the advice is focused on growing your income/wealth through some kind of investment like real estate, investing in the Stock Market, or some other investment. Very little advice is offered on how to better manage what you already have. I use to believe that what I earned was not enough; that making and having more money was the answer. However, as my income grew so did my desire for more, better, and bigger things. No matter how much I made it never seemed to be enough. Have you been there?
If you’re ever going to achieve financial freedom a clear financial plan (a budget) is key. A budget that helps you spend strategically and accomplish financial goals is the best way to ensure long-term success and financial freedom. Making more money doesn't translate into financial freedom. In fact, often making more money can lead to bigger financial mistakes, especially when there's no plan to manage your money.
The Ca$hflow game
A few years ago I bought the game Ca$hflow developed by Robert Kiyosaki. It is a fascinating board game that was designed to teach money management and investing skills. To win the game a player must use the surplus (the amount left over after all expenses are paid) to buy investments to produce cash flow (passive income) until the passive income is greater than the total expenses. Each player draws a card to be assigned a profession. You can chose one of 12 available professions such as a janitor, a pilot, a doctor. Each one has different incomes and expenses. Higher income earners have higher living expenses and lower income earners have lower expenses. The first phase of the game is getting out of the rat race, which interestingly enough is defined by the cycle of getting paid, paying bills, and waiting for the next paycheck to arrive. Sounds a lot like living paycheck to paycheck to me.
At first glance you may think that a higher income would be an advantage since it gives a player a better chance to win the game, however, that's not always the case. A player with a low income has just as much chance to win the game as a player with high income. The key to winning is to avoid any increase to your expenses, and investing the surplus to increase passive income.
In my experience of coaching on personal finances most people do not have a surplus. Regardless of income, a majority spend all they make and often more than they make, evident by their growing debt. If life is similar to the Ca$hflow game, which is what it was designed to mimic, many people have no chance of winning since they don't have a surplus to invest.
Budgeting is the #1 best thing you can do
Income is not the problem. Whether you make a lot or a little is somewhat irrelevant. What you do with that income is what determines whether you will ever become financially free. This is why budgeting is the #1 best thing you can do to become financially free. It’s the foundation you need to build a strong financial house that will stand strong through every season.
I’ve experienced many ups and downs in my income. Over the past 24 years on four separate occasions my wife and I have experienced a significant reduction in income. Twice my income was cut in half. Yet, in every season we were able to provide for our family’s needs and achieve the financial goals we set to achieve. How did we do it? Simple, we used a written budget that allowed us to plan our spending, make adjustments when necessary, and stick to our goals. Yes, there were challenges along the way. Life is unpredictable and many things were out of our control. Having a budget helped us to make better decisions and stay focused on what we valued most.
One day while speaking to a crowd, Jesus asked two rhetorical questions of those who were in attendance. He said, “Who would build a tower and not count the cost to make sure he has enough to complete it? Who would go to war without first considering if he can defeat his opponent?” The questions seem silly. After all, I can’t imagine someone doing either of those things without considering the outcome. Yet, a majority of people live their lives making and spending money with no plan and no consideration of how it will impact them.
Be different. Count the cost and consider the outcome. If you don’t have and use a written budget to manage your finances, start using one today. It will be the foundation upon which your financial house will stand. Without it, whatever financial house you build will eventually crumble. If you need help in developing and using a budget, check out the resources available under the resources tab.
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