Personal Budgeting – How to Create Free Cash!

Personal Budgeting

Mar 28

Investopedia defines ‘Free Cash’ – technically ‘Free Cash Flow’ – “as the cash (money) a company generates after taking into account cash outflows to cover operations and maintain its assets.”

We’ll cover this in another Budget and Grow Rich® blog post, but essentially, our households are similar to a company in that we receive a salary (income) and use money to pay expenses. What’s left over is Free Cash.

And Free Cash is what we can use for discretionary spending and investing to build wealth.

Of course, if you’ve been following our posts here, you know that we strongly recommend prioritizing investing to build wealth – save money for retirement, buying a house, whatever – over spending, especially discretionary spending. Discretionary spending means the stuff you buy but don’t have to buy.

And while I do pay almost all my bills online and via automatic payment (auto bill pay) whenever I can, I still reconcile my checkbook. Heck, I’m an accountant by training. Gotta do it. And you should too.

Over the past few months, I noticed that my ConEd electric bills kept going up and up. Maybe you’ve noticed this too!

The accountant in me took over and I just had to scroll back in time and review my checkbook.

Remember, I live in a two-bedroom apartment – 855 square feet – and work in an office pretty much every day and no one is home during the day. Now, my electricity bills are a fraction of what they were at the marital residence but the concept is the same.

Per my checkbook, my electricity bills for February 2021–2025 were:

  
    Year
    Monthly Cost
    $$ Increase
    Percentage Increase
  

    2021
    $64.32
    N/A
    N/A
  

    2022
    $69.40
    $5.08
    7.9%
  

    2023
    $77.52
    $8.12
    11.7%
  

    2024
    $95.02
    $17.50
    22.6%
  

    2025
    $100.87
    $5.85
    6.16%
  

And remember, that’s the cost increase for just one month. If we annualize – multiply by 12 months – the monthly cost increase, we pay even more for electricity over the course of the year.

If we annualize the increase between February 2021 and 2022 of $5.08 which was the smallest annual increase I incurred, we’d spend $60.96 more this year ($5.08 multiplied by 12 months).

And if we annualize the increase between February 2023 and 2024 of $17.50 which was the largest annual increase I incurred, we’d spend $210 more this year ($17.50 multiplied by 12 months).

Nothing like a good mathematical example to hit us between the eyes.

Ouch!

So you may be asking how this relates to personal budgeting?

Let’s get to it!

The true secret to building wealth is controlling your spending and creating free cash flow which you can invest to build wealth. In my financial planning experience, Many people overlook this very crucial point. But you won’t!
First, when you actually make a personal budget, follow it and analyze your spending regularly, you can get a realistic sense of the state of your finances – how your ‘money life’ and ‘financial life’ are going – whether your income exceeds your spending. Or whether your spending exceeds your income. In other words, whether your financial system is working, or not. . .
No surprise here, But our cost of living tends to increase over time for a variety of reasons. Some of which may be within our control and some outside our control.
But to free up cash, we have to look for ways to reduce our expenses.
For most of us, our income (salary) is fixed – fixed income.
Hopefully your salary and income will increase over time and increase more than our expenses and cost of living (COLA) increase.
We have some control over our income but we have More control over our spending and expenses – especially our discretionary spending!
This is precisely why it’s mission critical to structure your expenses, control your expenses, so they are less than your income!
And mission critical to continually wield the hatchet and trim your expenses!
And especially eliminate waste and unnecessary expenses. In my household, these pesky seemingly little wasteful spending and unnecessary expenses seem to creep up and creep into life. What about your household?
But now you’re aware of this and Armed to control your spending and reduce your spending.
Reducing your spending in some areas creates free cash – and this is one of the keys to building wealth – that you can use to offset price increases and offset cost of living increases, direct to other spending areas, pay down debt (which reduces your interest expense), and set aside money for an unexpected expense or two or for a rainy day. Many call the money you set aside an ‘emergency fund.’ In other words, by reducing expenses and cutting expenses in some areas, you’re freeing up cash to cover price increases in other areas and maintaining a balanced budget.

Today is a new day. Forget the past; it doesn’t matter.

Commit to trimming or better yet eliminating one or two expenses now.

For example:

Make your morning cup of coffee at home instead of spending $5 at Starbucks. Or. . .
Go to McDonald’s – my favorite – today to grab the McDonald’s iced coffee via the McDonald’s App for 99₵ – an amazing bargain.
Eliminate the premium cable channels. Some years ago when my children were young, they stopped watching the Disney Channel. I knew this but it must have been 18 to 24 months before I finally canceled the service. I probably wasted $83 to $125, after-tax.
Eat meals at home and invite guests over for a dinner party.
And when you dine out on the town, select a less expensive restaurant. Doing this even some of the time will save you money.
And so on!

Money in the bank. Your bank account!

Truly Enlightening (the electricity example that is) – Sorry.

Get to it!

See you next week.

Arthur V.

P.S. To Free Up Cash and Save More Money – click here.

Disclaimer: OH and Please Remember, we are Not financial advisors, financial planners, attorneys or accountants and are Not providing any specific financial, tax or legal advice here. Be sure to conduct your own due diligence and consult your own professional advisors to get sound professional advice that’s specific to your financial and personal circumstances, risk tolerance, time horizon and investment goals and objectives among other key factors!