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 

Day 12 / 31 Stop Lifestyle Inflation

Day 12: Stop Lifestyle Inflation

Day 12: Stop Lifestyle Inflation
Day 12: Stop Lifestyle Inflation

Have you ever noticed when you get a pay rise that even only a few months later you have no idea where that extra money is actually going? While at first you might have fantasized about all the great things you would be able to do with that increase in monthly income, the reality is this money often seems to magically disappear in just a short time and get absorbed into your regular budget.

This phenomenon is commonly known as lifestyle inflation and it means that every time you get more money, you also generally increase your minimum required lifestyle standard. Where at first you were happy with a second-hand car, that later needs to become a brand new car. And that brand new car needs to be handed in for a SUV just a few years later… Similarly your level of luxury on holidays, fancy clothes, expensive meals out etc. all increases, and likely any extra income is simply used for these purchases. Continue reading “Day 12 / 31 Stop Lifestyle Inflation”

Step 31: Understand you will never have enough money

Step 31 of the 100 steps mission to financial independence: Understand you will never have enough money
Step 31: Understand you will never have enough money

No matter at what stage in your life you are, you probably feel that you don’t have enough money to live the lifestyle you truly aspire, let alone to behave (even more) sensibly with your money. When planning out, or even just thinking about, putting money aside to save, invest or pay off a debt, it is tempting to justify holding off making that sacrifice until you…. (insert excuse here).

Until you earn more? Until you’ve finished your post-grad course? Until you are married? Until you have bought a house?  Until your children are independent? You can come up with a billion reasons here, many of them probably valid in their own way, so let’s look at some of the most common excuses, so you can appreciate that with every change in your life, your spending patterns will most likely also change.

There are two main reasons why this thinking pattern of “I will start saving when…” never really works: Continue reading “Step 31: Understand you will never have enough money”