A crucial trait to reaching financial freedom is the ability to see how all the parts of your financial life fit together.
Being able to make lifestyle decisions and see the implications, for better or for worse, upon your balance sheet and your cash flow can sometimes be challenging, but that doesn’t diminish their implications.
Being able to see how today’s decisions affect your future self makes the trade offs clearer and easier to make, because you’re able to see the impact to your balance sheet.
What to do if you’re not there yet?
Start with the big picture: Your balance sheet.
This will inform you of your overall worth. List your assets (eg your savings, your investments, your home value). List your liabilities. Subtract the 2 to see your net worth.
Next step: Create your monthly spending plan. This is your cash flow and will inform you on whether or not you are living within your means.
Start with your monthly take home pay.
Then subtract what you contribute monthly to savings and brokerage accounts, 529 plans, and IRAs (note: since your 401k is taken out of your paycheck, it’s already factored into your spending plan).
Next, start listing your non-discretionary costs (utilities, mortgage, groceries, insurance, prescriptions, gas).
Follow that up with your discretionary costs (entertainment, clothing, subscriptions, gifts, grooming, restaurants, coffee shops, vacations).
What does that leave you with?
Hopefully a net positive.
Since this part of the exercise causes you to look at how your lifestyle affects your balance sheet via the amount you are saving and investing, you very quickly see the implications on your goal of financial freedom.
This forces the immediacy of adjusting your costs so you can start to live within your means.
If you find yourself living within your means already, congratulations! It means you have accomplished the very significant goal of seeing how all the pieces fit together to solve your financial puzzle.