When people list out the steps to Financial Independence, they talk about setting a budget as a way to start. While I agree knowing how to setup a budget is a good skill set to have in your journey to FIRE, the budget itself isn’t where to start. Conscious spending should be at your core, but setting a budget and tracking your expenses are good tools to reinforce your awareness.
I have never maintained a budget in my life, but I have lived by the words “live beneath your means”; in other words, spend less than you have. This started in my early teenage years when I used to stare at the thick JCPenny catalogs my mom kept around the house. I fantasized about the big boomboxes they had in the electronics section. The concept of conscious spending started to take hold as I saw the small amounts of money I would regularly spend on things like snacks at school impacted my cash on hand. I saw how spending little bits here and there affected how long it would take to save enough for longer term goals, such as owning that fancy boom box. I didn’t particularly like work, so any money I had, I tried to hold on to it.
I never did save enough to get a boombox. But over time I applied “living beneath my means” to larger savings goals, especially after college. I went from motorcycle to motorcycle, then to expensive sports cars, finally to a house with every tool known to man in the basement and garage; there was also an engagement ring and elopement thrown in the mix. But I was always aware of what I was spending day to day and working towards the longer term goal I had at the time. For example, I made sure I turned off lights and appliances I wasn’t using, bought store brand food and only switched to name brand if the quality was poor, I used wood to heat my home, always found the best deal for a purchase on deal websites, sought out the cheapest gas station before filling up, and I practiced hypermiling in my car. All these little things added up to meet whatever my larger saving goal was at the time.
These past few years a few things have changed…
I have a natural tendency to consider my purchasing decisions and weigh their benefit at the time versus how they affect my long-term savings goals. But I am human and there are things that have trickled by, eating away at my savings rate over time. This is where Personal Capital has really helped me to become more focused on where my money goes and practiced in weighing the benefit of a purchase to the benefit of saving/investing that money. For instance, I spent $1,100 last year on ATM withdrawals in 2016 when I looked at my Personal Capital. I have no idea where that $91/month went and it feels like someone stole from me. Now that I review my expenses regularly through the app and website, I make as many purchases as possible with my credit card for points, cashback, and tracking purposes while keeping little cash on hand. I’m much more aware of the little expenditures that used to slip by.
I used to think saving for a down payment on a car or house was a big goal, and in the grand scheme of things it still would be, but I now think even further down the road. I no longer want things, I want the freedom to do what I want….to reach FIRE. I used to look forward to what the delivery guy was delivering, it was seriously like Christmas each day at my house. I think I derived an unhealthy amount of pleasure from those purchases. The almost daily deliveries of gadgets, clothes and tools was a temporary source of happiness and distracted me from the stresses in my life that would never be resolved with this rinse and repeat cycle. Now I feel quite the opposite, celebrating each day I’m able to enjoy experiences not things, and looking towards FIRE in the near future on those days when work gets to me.
I have realized the power of compounding. I had an embarrassing amount of savings in my checking account generating zero interest for years. Now my emergency fund is in a high-interest money market account, I have a CD, and the majority of my money is invested in the stock/bond market. This is where again, Personal Capital is key. It not only tracks your spending, but it also tracks your investments and each time you are paid interest on a bank account or dividends are received. These “presents” are ~way~ better that what used to show up at my door. They are truly the gifts that keep on giving.
I look at spending not as dollars and cents, but as time. Sometimes spending in the present is totally worth it, but I always stop and think if I really need/want the purchase today and how this spending will equate to working longer and having that much less time in my life to be free/retired. If I choose not to spend the dollars now and invest them instead, I’ve just shaved off a bit of time off my FIRE date. It helps to consider what saving those dollars would be worth in X years when investing them in something like the S&P 500, where they have historically gained ~7% interest a year (historical return of the stock market: http://www.simplestockinvesting.com/SP500-historical-real-total-returns.htm).
I now have a budget, but it is my yearly retirement budget I use as the “carrot” motivating me to save and invest today in order to support my early retirement. Using the 4% rule, I can calculate the amount of investments I need in order to reach my goal for FIRE whether that is traveling the United States in an RV, traveling the world out of a backpack, or working at a job regardless of pay. For example, based off my estimated yearly spend of $34,068, if you divide that figure by 0.04, you end up with $851,690 needed in various taxable and tax advantaged accounts in order to apply the 4% rule. While the 4% calculation is very rough and does not account for one time life events, it’s a solid way to get a ballpark figure on what you need to retire. This nugget is what you need in order to obtain the freedom to do as you like….I can’t think of a bigger goal than that!
This is my budget detailing what my monthly and yearly spending would look like while living a nomadic lifestyle on the road in the United States.
For folks in a reasonably good financial situation, conscious spending is foundational to your path to FIRE. If you ~need~ a budget to stay on track with your spending/goals, then the way you think about your finances is off and you aren’t practicing mindful spending. If you have the right mental makeup to evaluate each purchase decision and weigh what you are buying now versus extending the time it takes to obtain financial freedom (or other goals like a car, house, college savings for the kids, etc.), over time this becomes second nature and you’re well on your way. Merely having a budget won’t get your very far, but tools like Personal Capital can help you fine tune the right mindset.