Financial independence is hinged on three basic principles- Saving more than you earn, investing the surplus and budgeting the money you spend.
I’ll talk about the other two in some later posts but the whole process starts by controlling your spending through a budget. You can’t invest any money if you can’t save any and you can’t save any money if you don’t know what you’re spending! (unless you’re some genius freak of nature) So it all begins with confronting your spending and starting to get an understanding of WHERE your money is going every month!
This was the first step I took on my journey to financial independence and I now save over 50% of my take home pay, after tax and pension contributions. I used it to pay off my credit card, build an emergency fund, start working towards my future home and long term plan to reach early retirement.
Have you ever looked back at your working life and thought ‘huh I’ve worked x amount of years at a salary of x ‘ and wondered where you could possibly have spent all of that money?! Now obviously the business of being alive is an expensive one. your body is a food guzzling machine that demands to be fuelled regularly and it’s not gonna survive long living out open to the elements so spending money is necessary to live! But some expenses may not be as necessary as you necessarily think. Heh.
So lets take a look at where all of your money is going to go from here on out! This only works if you participate, so don’t just read along. Sit down, grab yourself a pen and paper because this could change your life.
The first step to creating a budget is to find all of your demanding payments- these are the ones other people will demand every month in the form of bills, direct debits, contracts etc. Examples can be rent, utilities, phone bills, monthly subscriptions. Write all these down on a piece of paper or in a spreadsheet (the latter being my personal favourite but my first budget was written on scrap paper) It should look a little something like this…
Car insurance- £50
(If you have any debt repayments the minimum monthly payments should go here)
Pretty Basic right? This budgeting stuff is easy! No Sweat!
The second step is to think of your monthly non demanding expenses (which is a misleading name but just humour me) All of these are things that don’t demand a certain payment or date on which they need to be paid. They can vary from month to month and you can control up to a point exactly how much they cost you. Examples are food, fuel, entertainment. These are a little trickier because there’s no fixed amount to each category. Now most people advise that you sift through three months worth of expenditures in order to assess how much you spend in each category but I disagree. That’s boring. I think you’re smart enough to estimate what is reasonable in each category. Now, my numbers are just examples and yours should be suited to reflect you and your lifestyle because my budget won’t work for you and your unique life!
Food – £150
Fuel/ transport – £100
Eating out – £50
Birthday gift- £20
This stuff is so simple! You’re probably ten minutes in thinking ‘Li, how is this gonna do me any good seriously? I knew all of this stuff already!’ But wait a second, here’s the good bit. I want you to add it all up… And write down the total.
For my example above the total is £1089 a month in spends. Times that by 12 for the yearly spending rate makes £13,068. But wait, that’s after tax! So divide your yearly spends by 80 and then times by 100 (assuming a 20% tax like we have here in the uk) and you need a salary of at least £16,335 year to fund this lifestyle.
Do you have enough for all of your expenditures? If so, great! I want you to commit to your new budget for at least three months and try your hardest to stick to it! Putting all the surplus – every penny- into a 5% or more savings account that’s independent of your current account and not easily accessed. Or use every penny of it to pay off your debts, starting with the smallest debt first. You won’t be needing those cards anymore!
If not, you’ll need to adjust your figures or risk getting into debt.
Cutting may sound daunting and unpleasant now but the human spirit is incredibly adaptable and you’ll find you don’t miss any of these things as much as you think you will!
Some immediate savings can come from small lifestyle changes like not eating out this month, walking more or being more intentional with your food planning -making a shopping list and sticking to it! I recommend a quiet month where you immediately cut your entertainment and eating out budgets completely and that should help to save you money on transport costs as well. You really can’t afford to keep spending above your pay!
Some much more longterm and deeper rooted savings can come from changes like reevaluating your living arrangements- can you let a room out? Or move to a smaller place? Your travel – do you really need a car? Could you bike the 5 miles to work instead? or carpool? Your phone bill- do you need all of that data or could you downgrade when your contract is up and continue using the same phone?
You’ll be surprised when you are open to changing these line items that things you deemed necessary before were actually holding you back from saving!
Do you budget? What have you found useful in your financial independence journey? Is anyone else living on half their income and what advice do you have? Comment below.