- 1.Budgeting my way towards Financial Independence
- 2.The most important ratio in FIRE: Savings Rate
- 3.How I achieve a plus 80% Savings Rate and is it the key to FI?
- 4.Cafeteria plan: improve wants & needs + take-home salary through self-chosen benefits
Since this is the first post I should probably start from the beginning: budgeting. It’s safe to say managing your budget is a key point to reach Financial Independence.
With the word “budget” being such a broad concept, I’ll lay down what I will cover in this post:
How I started budgeting
Well before I learned about FIRE, I kept track of my budget. In the beginning, I did it out of curiosity. Over time, this changed into a way to cut out useless expenses.
I originally looked into using an excel spreadsheet to keep track of my expenses, but during my search for templates, I stumbled upon YNAB AKA You Need A Budget.
I’ve been using YNAB for 6 years now. Mainly to keep track of my income and expenses and barely for its key functionality: budgeting (“every dollar needs a job”).
You might wonder why I bothered with YNAB and not just use Excel or Google Sheets if I don’t use the key feature of the tool.
Well, I used the trial version of YNAB for a month, not planning to take the full version. However, this changed after I used that free trial. I really enjoyed the simplicity and clean interface, also the graphs it provided were excellent. YNAB offers more than just the budgeting part to help you with your budget.
Besides, I also don‘t need the full flexibility of Excel (or Google Sheets).
My needs are straightforward and are all met by YNAB4:
- A place where I can generate a nice overview of my income and expenses
- Straightforward graphs showing my spending
- In a simple overview
- My spending trends (how much I spend on what every month)
- Income vs. expense
- Net worth
Additionally, it provides the possibility to export to excel. This will come in handy if the software becomes unusable. In case you didn’t know, YNAB became a Saas, or Software as a Service, in 2016. Their complete support ended a year later on December 31st, 2016.
This move is understandable from a business perspective but for me, as a client, it would mean I have to shell out 75,6 Dollar (-10% as a YNAB4 user) annually.
Don’t get me wrong, it’s an excellent tool because of the aforementioned reasons. The web app just doesn’t offer added value for me. I’m a frugal person by nature and what they improved is mainly regarding how to better manage your budget.
Every euro already has a job
As a result of my frugal mindset I never really had a problem not throwing money down the drain.
Of course, we are talking about my teen years and early adulthood so expenses were limited. It’s not like most people in this period of their lives have major expenses anyway. That said, I did notice that some had a lot more difficulty in keeping their money in their pockets.
Interestingly enough, I read an article about this exact topic just this week. I will write a separate post later. Basically, Swedish scientists investigated the saving behavior of twins that showed that genetic predisposition is most important in the setting aside of money. The saving behavior of identical twins was similar, while that of non-identical twins could differ, despite the same upbringing. Food for thought, right?
I have a natural tendency to think about how I use each euro I have, in other words, what job I give each euro.
The downside is that I can be indecisive when it comes to purchasing goods. Even smaller things such as earbuds, a new keyboard, etc.
Budgeting towards FIRE
My indecisiveness towards purchasing things is a nice way to take us towards the future: how will I handle my budget to finally reach what most (or at least those that read this blog) hope to achieve, financial independence?
After all, the money you spend on one thing is money you can’t spend on something else. This idea even has a nice name: opportunity cost. On top of that, what you buy has an impact on your budget for future purchases.
Keeping my expenses in check also helps me reach my personally set target Savings Rate (or SR) of at least 75%. With a savings rate of ~85%, I went over it by a good margin these last 6 months.
The term “savings rate” I just threw in there is something you will have come across if you reached this site to read more on FIRE, as such I doubt I’ll have to explain what it means. Nonetheless, it will come back later when I talk more in-depth about my way of living to reach such a high SR.
Keeping up with the Savings Rate
Keeping my SR at 85% is easy now due to my current way of living (with my parents), so I know it’s not realistic to think I can keep it up once I decide to move out. As long as I’m not on my I do plan to keep it as high as possible, i.e., around 85%.
Once I’m on my own, I’ll be happy with something like 50% – 60%. The exact level will depend on how I manage of course, so only time will tell.
Update 09/01/2019: In the meantime I created a post with a guestimate of my target FIRE age.