Step #1: Gather your financial information.

Gather everything that has anything to do with your personal finances including bank statements, receipts, investment records, bills, payment records, etc. You want to track all income channels and all spending outlets. Even if you buy a gum ball with a quarter every day, write it down and add it to your financial information. The more information you have, the better spending plan you can create. This process of gathering financial information will help you in the next two steps.

Step #2: Tracking income.

Record all sources of income including your net income from a regular job, monthly average from self-employment, and monthly average from other sources (i.e. sales on eBay). Add it all up and record the total amount.

Step #3: Tracking expenses.

Write down everything you spend money on throughout a month and a year. This will include rent or mortgage payments, car payments, insurance, phones, groceries, utilities, investment, quarterly or semi-annual club dues, entertainment, and anything else you spend money on. Your expenses will probably fit neatly into two categories: fixed and variable. Fixed expenses are those you know you will be paying that the amount paid will not change from month to month, like your mortgage payment. Variable expenses are those that can be included one month and not the next, or whose amount varies month to month, like groceries or entertainment. Also include things you wouldn't normally think of like how much you put away in savings each month, contributions to retirement or college funds, and emergency fund money.

Step #4: Total and make a plan.

Your goal is to have all of your income accounted for. Total out your income and expenses. If they are equal and you are spending money in the areas of savings, retirement, and the basic "pay yourself first" categories, then you are well on your way to financial independence. If you aren't spending money in those areas, you need to assign a monthly value to them, which will probably put you into the second category. If your expenses total is more than your income total then a spending plan is absolutely necessary for you. Figure out where you can cut out the fat and spend your money wisely rather than spend what you don't have. The easiest places to cut out the fat are in your variable expenses. If the expense is variable, you can spend less on it that you currently do. If your income is higher than expenses, it is time to start paying yourself more. Spend excess income on your savings, emergency fund, retirement, or education funds. Your income will always meet your expenses, so if you get a raise or a second job, plan where the money is going to go before you get it or you are probably going to spend it where you don't want to.

Step #5: Review.

To make sure you are staying on track to financial independence, you have to review your spending plan on a monthly basis. Did you come out equal in income and expenses? If so, you are on track. If not, you need to revamp your spending plan or recommit yourself to your financial independence.