Financial Freedom, commonly know as F.I.R.E ( Financial Independence Retire Early ) is a rapidly fast growing movement across the globe with more and more people wanting to live life on their own terms by reducing their outgoings and investing in income generating assets.
In this article, I’m going to explain the importance on managing your money effectively, how building solid habits around money is the key to long term success and then finally, I’m going to be giving you my 6 step process on how I allocated every piece of income that comes into my account.
Why It’s Important To Manage Your Money
Managing your money effectively is the first step that you need to master before doing anything, no matter what your goals are. People who manage their money well, are those that you never see “waiting for the next payday” , simply because they have everything mapped out and they are in full control of their finances.
However, one situation I’ve seen so many times is someone’s salary constantly increasing, yet they still find themselves in the position of looking for money come the end of the month.
Shortly, I’m going to give you a simple 6 step process so that you will never have to be in that situation, but first I want to talk about building a habit around managing your money,
Managing Your Money Needs To Become A Habit
Before I even begin to talk about the ways that you should manage your income to build financial freedom, we need to start off with the mentality and the way we look at our money.
It’s going to be a habit that you’re going to need to work on over time. There will be times where you will be tempted to break the habit but it’s vital you must push through and before no time, the bad temptations will never cross your mind.
In terms of how often you should practice this habit, it really depends on your income and what you do to receive your income. For example, if you run multiple businesses like myself and your income is constantly coming in small chunks on a daily and weekly basis, then you will need to be managing it more often than someone with a full time job, that receives a paycheque once a month.
For me, it’s taken over 6 years of managing my money to see some real benefits and whilst my situations have changed with both my personal life and with the money I earn, my plan to saving and investing my money for financial freedom has always stayed the same and consistent. I certainly, just like you went through the struggle at first when changing the way I did things but it only took a couple months before I couldn’t even remember the way I was with money before my big mindset shift.
Take a look at this common diagram that explains the process of forming a new habit:
Your Income Doesn’t Matter
When it comes to managing your money more efficiently, the best thing is that it simply doesn’t matter how much you actually earn. This entire process is put in place so that no matter what your salary is, you can still put the right steps in place to firstly, live within your means and secondly, starting making progress to building a solid financial future for yourself.
Of course, the more you earn the faster you can potentially reach your goals, but the main emphasis here is time and doing the same thing over a long period of it. Looking back at my situation as an example once again, I have seen my work salary go from £14,ooo per year up to £35,000, but they way I managed my money never changed.
My 5 Step Process For Managing Money
So here we go, my 6 step process on what you should do with every single piece of income that hits your bank account. It’s all percentage driven so it doesn’t matter how much you earn and what’s great, is that following this formula, helps you live completely within your means.
1. 50% for Bills & Rent / Mortgage
As sad as it sounds, the reality is a large chunk of your income will go towards your mortgage and bills. This just has to happen and everyone has to do. I personally believe that going with 50% and purchasing a house based on this calculation gives you enough income elsewhere to live a stress free life.
TOP TIP – Create a dedicated bank account to pay your bills and use it for only that purpose. From there, at the start of every month, transfer your 50% into that account and you should never have to worry about running out of funds to pay the bills. This will immediately reduce stress and anxiety about making essential payments.
2. FUN – 20%
We have to live right? As much as I love to preach saving money and investing what you can, It’s equally as important to maintain a healthy social life. Use this money for evenings out at the cinema, restaurants, shopping and bowling… you get what I mean.
Let’s say you were earning £2000 a month. 20% of that is £400. Now to me, I can have a-lot of fun in 1 month for £400, but when it’s gone, it’s gone until the next month.
3. Long Term Investments – 15%
This is the account where you can really make your steps towards long term financial freedom. This is where we want to be making our money work for us. Long term investments could be things such as stocks, Index funds, real estate, bonds and more.
I personally put the majority of my money into long term index funds which I think are great because they are extremely low risk, and I don’t have to do much research on them to start out with. Another great benefit of having an index fund is that they pay you dividends every year from your investment. If you’re unclear about dividends, index funds and stocks, then check out this video I made on my YouTube Channel where I revealed my entire investment portfolio.
4. Cash Savings – 10%
Whilst there is so much information online about reducing your cash holdings due to things such inflation etc, it’s also extremely important to have some money for a rainy day. What I like to have is a minimum of 3x worth of my bills in savings incase I lose my income source or I receive an unexpected bill. I would say stick with this rule and once you reach your limit, you can be more flexible about where your money goes. For example, if you have enough cash for a rainy day, maybe a percentage of this allocation could go towards longer term investments, or maybe some extra fun activities.
5. Personal Development – 5%
So many people overlook personal development, but this really has been the one thing that I have invested into in recent years that has both increased my income and increased my personal well being. Use this money to invest into books, courses ( from the right people ), seminars, a gym membership and basically anything that can improve you from a mental or physical point of view.
Don’t be afraid to switch things up
Now, whilst these are the recommended percentages that I follow today, there is absolutely zero harm in switching things up. For example, if your bills are only coming out at 40%, don’t be afraid to add some more money into your investment pots, or even go as far as adding an additional one. I have in the past added a 6th pot for more riskier investments where I try and make higher returns in a shorter time frame.
Managing your money correctly is in my opinion one of the most important things that you should start doing as early as possible. The sooner you start building a solid habit and routine, the sooner you will be on the path to achieving financial freedom.
If you wanted some video content on financial freedom in 2021, then make sure you head over to my YouTube channel and check out my dedicated Personal Finance Playlist – Click here.
Finally, if found found any value from this post, then it would mean a-lot to share it across your social medias or with a friend that struggles when it comes to managing their finances.