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!

Part 1: Set Your Financial Independence Goals

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

When you start your journey to financial independence there’s a lot to consider and go through. There might be many new things you’ll end up learning about or just points you had never really thought about before.

To avoid you feeling overwhelmed and to provide some structure to your path to FI, I’ve divided the many topics into 10 smaller parts, to help you get started on your journey to Financial Independence.

Part 1: Set your Financial Independence Goals

Before you set out on any new adventure, it’s often helpful to take a step back and think about why you are embarking on that new mission. What are you trying to achieve?  What aspects of your current situation are you not as content with and would you like to change? How would your life change for the better? Once you know why you are starting  this new journey, it’ll work as a motivator to get back on track anytime you find yourself veering away from it.

Once you know your reason, it is equally important to define what your new situation would look like when you get there. What is your end goal? What are some of the milestones that you would need to achieve before reaching that final destination?

It often helps to state your objectives as clearly as possible and to visualise exactly what that would look like. Instead of thinking you would like to have more money, define why you want that money, how much you want, what you would do with it and picture what your life would look like.

Here is an example of what that might be:

“I want to have more money so I can spend more time with my family being outdoors. In particular, would need X amount of money to buy a small condo in the mountains. During holidays and for long weekends we can just drive up to our second house and enjoy our time together out in nature.”

Lastly, an important aspect of part 1 of your journey is keeping track of your progress to financial independence and motivating yourself to stick to your targets. You can do this by creating a vision board with your goals, by creating a tracker of your progress as well as by celebrating each time you reach one of your smaller milestones along the way.

Find some time today to look at the questions and guidelines above and then note down some of your answers to them to get you started on your path to Financial Independence!

The above is an adaptation of part 1 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 2 of the Journey to Financial Independence: Define your Starting Points