How Controlling Your Living Expenses Can Lead to Financial Freedom

What should you consider in coming up with your living expense level?

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Many things in life are beyond our control, such as the cost of gas or groceries or when the repair guy will show up to fix the furnace. While it can be frustrating when we can’t control situations or people, it is best to focus on the things within our control.

We can control many aspects of our lives, such as when we wake up in the morning, what we eat for breakfast or choosing to focus on the positive things in our lives. We especially control our financial future. We control our financial freedom by examining our life goals and structuring our income and expenses accordingly.

If your focus is retiring at a certain age, determining your living expenses is one of the critical levers you can control. The lower the expense level, the sooner you may be able to retire and experience financial freedom.

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What should you consider in coming up with your living expense level?

1. Determine your fixed costs.

Fixed costs are the things you must pay for, such as rent or mortgage, groceries, utilities, car payment, health care premiums, etc.

2. Decide on your must-have lifestyle expenses.

Determining these expenses means thinking about what kind of lifestyle you want to live and how hard or long you want to work to fund them. If you want to go on lots of vacations or have a second home, it will require additional income to cover these expenses. However, this expense category might be relatively small and easy to accomplish if you are a minimalist.

3. Allow for ‘life’ expenses.

Once you have determined your fixed and lifestyle expenses, you should add an amount to cover unexpected expenses, such as car repairs or a new roof, that can suddenly arise. Calculate an extra 10% to 15% of your total monthly fixed and lifestyle living expenses for this category of expenses.

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4. Have a cash cushion.

Life happens; sometimes, events are beyond our control and careful planning. Keeping a cash reserve of three to six months of living expenses can help keep you from veering off course.

5. Save for retirement.

Though this is lower on the list of expenses to review, it is the key to financial freedom. Now that you’ve contemplated what you want your life to look like and when you want to retire, you must save for it. This may require you to review the above expenses and adjust your priorities. Do you work longer? Do you modify your must-have lifestyle expenses or find ways to lower your fixed expenses (i.e., smaller house, less expensive car)? Working with a financial planner can help you figure out the required amounts, but only you can prioritize what’s most important.

6. Keep tabs on your expenses.

All the careful planning and budgeting is a waste of time and effort unless you consistently review your monthly expenses to ensure you do not overspend. Maintain a spreadsheet or use one of the many online apps to track your expenses.

Incorporating the above suggestions can provide a solution to obtaining financial freedom and enjoying the life that you dreamed about. Consistency is the key to making the process work in your favor.

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The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.

Mario Hernandez