Last updated: September 1, 2020
The mechanism behind reaching financial independence is pretty simple. You will need to spend less money than you earn, invest the excess and eventually you will end up generating passive income.
You do this by maintaining a monthly budget with the purpose of maximising the savings rate. The greater the savings rate the faster you will reach financial independence. Let’s deep dive and better understand the concepts.
Budgeting. Such a scary thing for most of us! And for good reasons.
Running a budget is not easy. Traditionally, you'll need to keep track of your income and expenses. After that, you need to define categories, like Food, Education, Entertainment, Health, and the list goes on. And finally you need to assign a monthly amount of money per each category, and then track daily expenses to make sure you don't go over that. All of this, while you’re fighting to figure out how the hell to make that Excel spreadsheet work.
It can really take a lot of time and efforts and most probably will transform into a nightmare to maintain. Is definitely not easy, and ca be stressful.
Isn't FIRE all about saving time and ultimately make our lives better?
You bet it is! And, I don't even want to hear about delayed gratification. Really don't get me started to brag about that! I want things for me and my family to be great right now, not tomorrow.
So, I had to find a better way to keep a budget, without the usual hassle. After all, I can't just skip doing it, as this is really mandatory on our journey to be free. Good thing is that I have found a way how to make it work for us! Is not perfect, but gets the job done, and I don't have to waste a lot of time, if any.
So here is what I'm doing to run my family's budget.
After extensive research and trial of many tools I have found an app for mobile and desktop called Fentury. I am using it for almost two years already.
The app connects to my banks, pulls down all the data about accounts and transactions, and automatically categorizes all my expenses. No manual work, maybe just a little in the first few transactions, when it may not set the right category for some of them, but once you make the correction it will be okay in the future.
As for budgeting it has a feature called Monthly Planning where it defines 3 buckets, and you can set what percentage from your monthly income should be assigned to each bucket.
Here are the buckets:
- Must Haves - things you cannot skip, like bills, rent, food, taxes, etc;
- Spendable - things you can skip, your daily expenses, like coffee, beer with friends, dinner at the restaurant, vacations, movies, and so on;
- Savings - what's left after all expenses on Must Haves and Spendable.
What's smart about it is that it works based on Kiyosaki's principle of paying yourself first. Instead of setting up Must Haves and Spendable, you set Must Haves and Savings. So you will define how much Savings you want each month, and then adapt your daily spending a.k.a Spendable to fit that.
I'm telling you, the app is really awesome. It saves me tons of time as it only needs around 5 minutes to update all transactions from my bank accounts. And it also allows me to see in real time how I am doing budget wise. Beautiful, just beautiful! That's exactly what we want, to be smart about how we approach everything.
One more thing about it. As you may know, there are many apps out there that are only working with American banks. Well, this one actually works great for us Europeans, and I'm pretty sure it will support your bank as well. Just try it!
That's really it about budgeting. Check out the pie chart below for a visual representation and my real numbers. And keep reading this blog, as I will write soon a more detailed article about budgeting.
Next, let's discuss about savings rate. As I have a fully automated budgeting solution, now I can really focus on getting our savings rate as high as possible. The way to increase the savings rate is to decrease expenses and increase income. Let's see how we can do that.
Most of the time decreasing expenses will impact your lifestyle and gains can only be marginal in terms of savings . As I don't believe in frugality, I take a rather different and focused approach to spending our money. This means that we are trying to better understand what makes us truly happy and what don't, which will allow us to limit spending on areas that will have little impact into our overall well-being. Again, we have to be smart about it.
Example: we don't value branded clothes, as those are really not making us any happier, just wasting money, but we enjoy food, especially mediterranean and sea food, so we spend a lot of our energy and money into either trying new restaurants or cooking something new ourselves.
So spend your money on things that are making a difference in your life!
This is the key for achieving financial independence faster. Most of the high income people will end up having crazy big savings rates like over 80%. A night out at a restaurant will not have a big impact in that case, so think about it.
You really need to figure out how you can make more money, how you can increase your monthly income. This is the area that's scalable and this is where you should really focus.
I won't try to suggest anything for you right now, as you can find tons of ideas on the internet. I'll just mention something that worked for me in the past - selling Wordpress themes. If you're a developer, you can definitely try that. There is work you need to do upfront, sure, but later on, it will transform into a semi-passive income.
Anyway, see below how we are doing in terms of savings rate. Overall, we are at over 50%, and as you saw above, our current target is 65%.
Just so you have a rough idea, increasing savings rate by 15%, from 50% to 65% will decrease time for us until financial independence by 5 years or 30%. Interesting, right?
There are a few big dips:
- April 2018 - this is where I had to buy myself a new MacBook. My old one was getting quite slow, and I wasn't very productive anymore. Also, as I did a business trip to US, I seized the opportunity to get it much cheaper - around 15% discount;
- October 2018 - did I mentioned we love to travel? Well, we had a wonderful trip to southern Spain. Although our budget took a hit, it was well worth it. We enjoyed amazing food, good wine, and truly fell in love with Marbella;
- December 2018 - well, you know, Christmas, gifts, charity, etc..
- March 2019 - one word, taxes.
- April 2019 - more taxes (25% of expenses), but also a city break in Taormina, Sicily, and it was amazing. Italy, again, didn't disappoint us.
If you're interested, here is the raw data as well:
|Year & month||Savings rate|