Tracking everything you spend has some major benefits. It turns reaching financial independence into a game.
Each month you compete with yourself to do better than last month.
Each year better than the year before.
You can map your progress on a simple chart (as above):
- Earned income (yellow)
- Spending (blue)
- Passive income from investments (green)
The chart shows 4 years of spending efficiency improvements, an increasing savings ratio, and increasing passive income.
I love this chart, for it is the answer to the question:
How do you reach financial independence?
Earning more and spending less
It’s tempting to think you should focus on earning more money in order to reach FI.
There are three problems with this though:
- Lifestyles have a sneaky habit of inflating to use up any pay rise
- Pay rises, after tax, have only a relatively small impact on the amount you can save each month (as can be seen from the chart above)
- Pay rises are only partially within your control
The key to your freedom is how much you spend and that, it turns out, is completely within your control.
No such thing as a typical month
One thing that became clear, when I started tracking, was that there is no such thing as a typical month.
I used to budget: so much for the mortgage, transport, food, taxes, insurance, entertainment, etc.
These budgets are a fiction though.
In reality each month is different with spikes in spending due to, for instance, a vacation, a big purchase, a Birthday etc.
Discovering the truth about your life
Tracking brings honesty and integrity to your relationship with the money you earn, spend, and save.
You start to see each expense in terms of the hours or days you had to work to earn it:
- 2 days of work per month to pay for the fuel used on the commute
- 2 days to pay for the car
- 1 day to pay for work lunches
You can find that you’re working a week per month just to pay for working!
Keeping your spending diary
It is easy to keep a simple spending diary on paper or in a note in your phone.
This simple act brings awareness to your spending. As you note it down you have a moment in which to see how your spending makes you feel.
Everything that gives you fulfillment stays
When you spend your money on something that truly gives you fulfillment (in proportion to the number of hours of work required to earn that money) you feel totally at ease noting that spending down.
On the other hand you’ll quickly become aware of spending that is just a habit or that provides no increase (maybe even a decrease) in your happiness. It won’t be long before this spending will stop.
It probably won’t be long before you start having days where you spend no money whatsoever!
Creating your chart
At the end of the month tally up your spending into categories that fit your life (e.g. home, transport, utilities, food, clothing, entertainment, vacations, social, hobbies, fitness, work, giving, etc.).
Then you can start to draw your chart of income and spending. As you save and invest, you can also include the passive income that comes from your investments.
Towards freedom
The key thing, to start with, is growing the gap between income and spending.
Increasing your monthly savings ratio.
Accelerating your progress towards financial independence … towards freedom.
A simple step to take today …
Note down everything you spend during the day.
You can benefit today from taking a step towards financial independence (FI). The greatest benefits come way before you have plenty of money and can retire early (FIRE).
