Everybody who is embarking on a journey towards financial independence find themselves pondering three things;
✅How much do I spend?
✅How much do I make?
✅Is the differential enough to make me financially independent – and when?
Usually, if the difference between how much you earn and spend is positive, then at some point a fourth item will start growing in the back of you mind
✅How do I best invest my proceeds, so I can become financially independent event sooner?
Your starting point!
It is really important, that in order to progress on a sustainable path of positive wealth creation and financially independence, that you understand your starting point. Regardless of where you are in life, regardless of whether you have a relative high income, or a relative low income, being in control of your finances is just so important.
Depending on which ressources you turn to in order to get inspiration for your journey, there will be different advises served. Some people will tell you it is more important to build your income, some people will tell you to just frugal the shit out of it, and some people will offer investment advise ranging from crypto currencies, crowd lending, stocks, bonds, real estate, artwork, stamps and you name it.
Please, what ever you do, understand your starting point, and your current financial limitations.
Understand how much you spend
I will argue, that the best – and most boring 😴 thing to start with, is to understand how much you spend. You can use a lot of time on it, or just a short time, but regardless – just get the overview. It doesn’t have to be hard. You don’t have to spend hours and hours slaving through individual transactions from your credit cards and physical receips, and build big impressive excel sheets. Nowadays, your homebank will give you so much help.
I recently spend a day over Christmas to get an oversight of my family’s expenses for the past 2 years, in order to try to get an even better understanding of exactly how much we have spend in our family, and to get any insights into how we might actually improve in order to build even better free cash flow going forward.
Below you can see the result. On average we spent 7.300 USD a month in 2018 and were able to reduce that to 5.900 USD in 2019. Obviously there are rather large monthly swings, as the chart shows. And then there is JULY 2018 – OMG, I almost feel sick just looking at it. 🤒
How the HELL could we spend almost 16.000 USD in a single month, and what the F*CK did we buy. After obvious investigations into any data errors in the excel sheet, it turns out, that July 2018 was the month where we bought a new bed. – At roughly 5.000 USD. Also, apparently it was the same month our old dishwasher broke. So we bought a new one – Miele – at roughly 2.000 USD. I have always been a frugal person. I have tried to hold my wife’s expenses down as well, but with my newfound FIRE purpose in life, I almost want to vomit. 🤮. That said, my wife and I have been together for 20 years now, and we have actually newer bought a bed before. We spend 18 years on our joint together box matresses.
Oh well – at least we have been able to sizably reduce our family’s expenditure in 2019, and optimistically I have put in the goal for 2020 of an average 4.900 USD/month.
Understand how much you take home
Equally, just as important to understanding your expenses – and controlling them – is it to understand how much you bring home every month. This is the part that will actually build your wealth given that your are able to preserve it right.
Again the good homebank will come handy. Below is a monthly break down of my family’s income for the last two years. Also, there is an overview of the resulting monthly savings, when the expenses from before are subtracted.
Looking at the numbers, I am actually a bit surprised of just how much volatility there are in the numbers. I have not included any “passive income” in this chart, so it is actually only wages and child support from the government. In a normal month, we will make a total of 12.000 USD combined.
Again, I actually had to investigate exactly why the two summer months were so big on the income side. Aarh, right, turns out, that in the summer of 2018 I actually had 6 months of double wage, as I took a voluntary redundancy from my old employer, and 3 of those months actually paid out as a one off in august 2018. Sweet. Hmm, now I remember, that was also the reason we actually bought our new bed, because we knew this money was coming.
July 19 – what the heck is that then. Oh right, it was the money we got back from selling our balcony. That is actually a funny story your can read about here; We sold our balcony – I know – weird?
Understand where it is going
Good thing about these online homebanking tools is that all of our expenses will automatically be categorized, when we use our credit card. So depending on which shop we use it at, it will already have a standard categorization into the categories you can see below. Obviously it doesn’t work perfect all the times, but it will give you good – and quick – financial insights.
Pie chart above is a percentage distribution of all of our cost for the last two years, so it will likely represent a typical cost distribution in our household. Looks like some of the obvious places to look at reducing cost is in housing, food, leisure, representing a total of 64% of expenditures.
Year by year development in the cost categories can be seen below. A couple of apparent success stories here is that almost all categories have been reduced from 2018 to 2019. Housing and transport have been seen the biggest reductions, but wait – Leisure has actually increased. Looks like “evil” dad will have to reduce some of the kids fun going forward. That is unlikely to be positively received. 🤦♂️.Guess the PS4 will have to go.
Understand what you need
Reflecting on my family’s expense categories, I think it is important that one sits down and thinks/decides on what is actually needed in everyday life. Some of the dumbest choices in my opinion is to oversize certain cost categories, like housing, transport and the like. It is really those categories that are the differentiator between the “normal” life situation and the wealth creating one that is needed for becoming financially independent.
Be aware of your wants
Don’t compare yourself to other people. When you meet the Jones’es, pity them. Don’t try to keep up with them. Concentrate on your own goals, your own journey and delay purchasing that “thing” that you so badly want. At least until you can pay for it in cash. Most of the time you will experience that while you save for it, then when you reach the goal, you might actually want something else.
Develop your plan – both long term as well as short term
Develop a plan for your financial journey. Do the legwork of actually understanding your current cost picture. Plan where you want to be financially and when. Your savings ratio is something you largely control yourself. It can be managed and planned. Investment returns cannot.
We do this all the time at our workplaces. Adhere to KPI’s, evaluate FCF, analyze ROI and so on. Get down and get dirty with your own finances. Be explicit about it. Both to yourself, but perhaps also to others. Set goals for yourself. You can see mine here; My financial goals for 2020
Celebrate progress and reward yourself
Initial habit changes will be hard, especially if you are embarking on a radically more frugal lifestyle then you are used to. It helps to be conscious about any progress. And to celebrate 🎉 any small successes along the way.
Good luck 👍
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Please check out these excellent ressources for adopting a financially independent & minimalistic lifestyle;