Part 3: Check your Expenses

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Now you’ve decided on your goals for Financial Independence and have also determined your starting point of what your finances currently look like , it’s time to continue with some practical steps  in order to begin your journey to achieving your financial dreams. In the next 7 parts we’ll be looking at one of the main areas of personal finance in turn, starting with your expenses. 

Part 3: Check your Expenses

In order to get your expenses under control and ensure you don’t have more money going out than you have coming in, the first step is to start a budget and thereby consciously decide where your money will go each month. A budget can be as detailed or general as you’d want it to be, as long as it helps you spend your money on those things you actually want to spend money on. A useful guideline in budgeting is to use the 50/20/30 rule: use 50% of your money for the essentials (such as rent /mortgage, groceries, utilities), 20% for net worth improving expenses (including paying off debt, saving or investing) and 30% for the fun stuff: holidays, eating out and your hobbies.

Once you’ve set your budget and as a challenge to yourself, choose one expense to try and limit as much as possible for the rest of this month. This can be anything from your coffee on your way to work to your utilities bills. Keep aside any money you save from the limit-one-expense challenge for the rest of the month.

This money will be the start of your emergency fund that you are going to build up over the next few weeks / months. Your emergency fund will be your financial cushion for those moments you need to pay for something that is unexpected but crucial in the moment, such as a plumbing expense, car repair or  washing machine replacement. By having this emergency fund you avoid having to go into debt or eat into your savings in order to pay for it. Aim for around $1,000 or the equivalent in your currency.

The last task in the expense part of your financial awareness path is to become aware of the power of lifestyle inflation and take measures to prevent this from happening to you. Lifestyle inflation is the perceived devaluation of one’s lifestyle, resulting in an increase in expenses every time your income increases , in order to live more comfortably: the more you earn, the more you automatically spend, almost without noticing. Think about the last few years when you’ve maybe had a pay rise. How much of the extra money do you end up spending without even noticing? Can you identify where this money is going? From here on try and automatically save (or invest or pay off debt) 50% of any extra money that you get. In that way you avoid spending everything immediately and instead allow yourself to focus on your long-term financial goals.

Find some time today to look at the tasks above to complete to keep progressing on your path to Financial Independence!

The above is an adaptation of part 3 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Coming up next: Part 4 of the Journey to Financial Independence: Become Debt 

Part 2: Define Your Starting Point

Get your FREE sample of the 100 Steps to Financial Independence Book here

After setting your goals to Financial Independence, the next part of your journey is to determine your current starting point. With those two things together, i.e. where you want to get to and where you currently are, it’ll be a lot easier to plan out how to achieve your goals.

Part 2: Define your Starting Point

One common obstacle to achieving financial independence is consumer debt. Most people have some type of debt they have to deal with and pay off, such as student loans, credit card debt, car loan and / or a mortgage. The first step in determining your starting point is to list all of your debts with their current outstanding amounts (i.e. what you still owe) and then total those amounts to get an overall amount.

While debts represent the negative side of a financial picture, most people also have a positive side: their assets or possessions that are worth something. This can include anything from a house to a savings or investment account as well as antique or art of a certain value. Do the same as what you did with your debts: list anything you own along with its estimated value and total those amounts.

With these two numbers you can now calculate your net worth: a very useful indicator of how healthy your personal financial situation is. Simply take the total value of all your assets, then subtract the total amount of debts you have to find your current net worth. Note that this might be a negative number!

Lastly as part of determining your starting point, it’s a good idea to get a solid overview of your current expense patterns. Not only does this help to see where your money is going, it will also come in useful when you start setting goals later on in your journey for the various financial areas we’ll be looking at. Start logging your expenses on a daily basis to get a good idea of what you spend your money on.

Find some time today to look at the tasks above to complete to keep progressing on your path to Financial Independence!

The above is an adaptation of part 2 of the 10 parts in the guidebook to Financial Independence100 Steps to Financial Independence: The Definitive Roadmap to Achieving Your Financial Dreams where you can find more details as well as action plans and guidelines to each of the 10 parts. Available in both ebook and paperback format!

Coming up next: Part 3 of the Journey to Financial Independence!

Day 10 / 31 Build a 3 Months Living Fund

Day 10: Build a 3 Months Living Fund

Day 10: Build a 3 Months Living Fund
Day 10: Build a 3 Months Living Fund

Little by little you are improving the financially weak areas in your life: with an emergency fund building up you are taking away the risk of having to go into debt when an emergency expense comes up and by paying off your debts you are regaining control over your finances and reducing the amount of interest you are paying in the long run.

There is another very powerful safety net you can create for yourself: a 3 months living fund. Such a fund would have 3 months’ worth of expenses saved up in case you are without an income for a while. There can be many reasons you might find yourself without an income for an amount of time such as loss of a job, taking an upaid sabbatical to look after an elderly parent, or taking time off for yourself to name just a few. Continue reading “Day 10 / 31 Build a 3 Months Living Fund”

Day 4 / 31 – Limit one Expense

Day 4: Limit one Expense

Day 4: Limit one Expense
Day 4: Limit one Expense

Now that you have created a budget (Day 3) and started tracking your expenses (Day 1), I am sure that you are becoming aware of some expenses that you currently have that seem way bigger than you thought they would be.

Day 4’s challenge is to have a quick and stern look at your expenses and then pick one (and only 1!) that you are going to limit for the rest of the month.

Look at the budget you made yesterday as well as your expenses up to now, and pick one expense to reduce. Make a rough estimation of how much you might be spending on it each month, then set yourself a goal of how much you can save during the next 4 weeks. Remind yourself of this goal every day, as at first I am sure you will get tempted to go back to your old habit! Continue reading “Day 4 / 31 – Limit one Expense”

Day 3 / 31 – Start a Budget

Day 3: Start a Budget

Day 3: Start a Budget
Day 3: Start a Budget

The challenge for day 3 is to start a budget and plan on how you are going to spend your money this month. A budget not only ensures that you have enough money assigned for all of your expenses (and avoid running out of money at the end of the month), it also guarantees that you plan ahead and start setting aside some money to pay down debt or to add to your savings. Without putting in a plan, these long-term goals are unlikely to get prioritized and are therefore often forgotten about.

As you start your budget, think about the various expense categories that you have (such as utilities, car payments) and the individual expenses you have within each category (electricity, gas, water) that are likely to come up this month, both ones that are relatively predictable each month (such as rent / mortgage, groceries, utilities) as well as any less regular expenses such as birthday presents, clothes or meals out in restaurants.

Once you have a list of all expenses you expect to have, look at your expected income for the month and start assigning your money to each category, being careful not to budget any more than you have coming in. You can do this again on paper, in a digital spreadsheet or in a budgeting app or online program. Continue reading “Day 3 / 31 – Start a Budget”

Step 80: Your Savings Rate

Step 80 of the 100 steps mission to financial independence: Your Savings Rate
Step 80: Your Savings Rate

Now that you’ve got a bigger picture of your long-term financial goals, it is equally important to identify ways to achieve those goals. Hopefully by now you’ve set yourself some big financial goals to work towards to in the near future. These could range from earning some extra cash, becoming debt-free and paying off your mortgage, to reducing your work hours or retiring early.

Why exactly do so many people still have debt or no financial or pension plan for their future? Ask anybody in your environment and a vast majority will say that they just don’t have enough money to pay off their debt or to throw at their pension fund. They’ll tell you that they might plan to pay off their debt as soon as they get that promotion and accompanying pay raise. But by now you probably know that even when they get that increase in income, they still most likely won’t be using that money to pay off their debt, nor will they tuck it away and use it to invest in their pension. They’ll simply spend it on new things and without them even realizing it, their lifestyle will gradually inflate to a new level.

And are you maybe still telling yourself a version of this story as well?

Let’s think about how you can speed up your savings goals. Simply speaking and as we have already discussed in earlier steps, there are generally two ways to increase your savings:

  • increasing your income
  • decreasing your expenses

The disadvantages of looking at achieving your savings goals in this way however is that it is easy to focus on the finding excuses for not saving more: “I don’t make enough money”, “If only I earned another $1000 a month”, “It’s so much easier for my neighbor, he earns a lot more than me”, or: “I wish I didn’t have a mortgage for 30 years, it’s a big expense each month”, “It’s easy for you to say, I came out of university with a $50,000 debt”, “I have two young children, do you know how expensive they are?”…. And the list goes on and on and on. Continue reading “Step 80: Your Savings Rate”

Step 77: Make a Year Budget

Step 77 of the 100 steps mission to financial independence: Make a Year Budget
Step 77 of the 100: Make a Year Budget

We’ve looked in detail at making a monthly budget where you carefully plan your expenses per category per month to ensure that you achieve your goals, both short-term as well as long-term, especially when it comes to savings, pension and investment goals. Without a budget it is easy to overspend and to lose the overview of where your money goes each month.

In addition to making a monthly budget it is wise to also draw up a yearly budget in which you make a yearlong plan for your expenses. We’ve already touched upon this a little when we discussed making a monthly budget, when we looked at the importance of bearing in mind certain yearly expenses that don’t come up every month but might come up just a few times or even just once a year.

A yearly budget doesn’t only ensure that you remember to budget for these expenses though. The added advantage of a yearly budget is that you can make a better and more accurate plan for your expenses by bridging the gap between your long-term financial goals with your day-to-day spending patterns. Of course, having a monthly budget already gives you the opportunity to plan expenses far better than if you just spend without being fully aware of your monthly total spending pattern. But it won’t give you as much insight into whether you are on your way to achieving your long-term financial goals or whether you are still quite a long way off. By making a budget for a full year you get a far better overview of this. Continue reading “Step 77: Make a Year Budget”

Step 76: Translate Expenses into Time-Costs

Step 76 of the 100 steps mission to financial independence: Translate expenses into Time-Costs
Step 76: Translate expenses into Time-Costs

Every time you spend money you spend time. It’s not the good old “time = money” adage you should worry about, but the exact opposite: “money = time”, which although might seem to mean the same, is much more pertinent and important to remember than the first one. If you are like most people, the bulk of the money you have to spend each month comes from your job in the form of income. Each month you start afresh with a new paycheck of money coming in on one hand and also new bills to pay on the other.

It’s a logical sequence of how things work: You have bills to pay therefore you need a job so you can generate an income to pay these bills. Your job provides you with money so you can pay your bills (and then spend some more). The next month it starts all over again when there are new bills to pay and another month to work to pay these bills.

You are working for an income and regardless of your profession, your job is designed to trade time for money. You put your skills and expertise to use and in exchange your company gives you a salary. Change from a full-time job to a part-time one and you’ll likely get less money (less time = less money) and vice versa. Continue reading “Step 76: Translate Expenses into Time-Costs”

Step 74: Get one Month Ahead

Step 74 of the 100 steps mission to financial independence: Get one Month ahead
Step 74: Get one Month ahead

This step is a hugely important advance in getting control over your finances with the ultimate goal of moving away from living paycheck to paycheck and instead working towards a situation in which you live on last month’s income. Being one month ahead of your finances takes away a lot of stress and worries and gives a small extra financial cushion in your account. I’ll discuss the advantages and disadvantages of this practice first before looking at how you can implement this.

Being one month ahead essentially means that you are using last month’s income for your current month’s expenses. It means that you are ahead of your finances by having an extra month’s pay in your bank account. The money that you are earning this month won’t be used until next month.

The advantages of getting one month ahead

The biggest advantages of being one month ahead include:

  • It doesn’t matter if you get paid 2 or 3 days late, or if a bill comes in earlier than expected.
  • You don’t have to worry about going out next week instead of this week if you haven’t yet been paid.
  • If a bill is larger than expected or budgetted, you don’t have to worry about not having the money and it gives you time to readjust your budget next month.
  • Lastly, if you have a variable income, you can see a lower income month coming with some warning in order to make any necessary adjustments in your spending .

Continue reading “Step 74: Get one Month Ahead”