In a recent blog article I shared my financial story to this point. I went through plenty of ups and downs and was by no means an early starter. My goal is to make financial freedom more relatable and feel more achievable through sharing my experiences. Well today we continue the voyeurism theme. I will be exposing myself financially for you all to see.
Please do not take this as bragging. There are many people doing a better job than I am. My reason for sharing my transition is to provide examples of the grand effect small changes can make.
In the table below you will see my expenses, income and savings rate before and after I discovered financial independence.
The cruising Nick never used to budget because he didn’t know any better. This is my best estimate of 2011 costs and it won’t be far off. As you can see my savings rate in 2011 was 0%. In other words, all income was being spent, not saved.
Savings rate is the single most important metric that determines how long it will take to reach financial independence. An annual savings rate of 40% should be enough to retire in 22 years if starting from zero.
So how did I go from 0% to 40% when the cost of living is increasing?
It was definitely a gradual process and didn’t happen overnight. It takes time to retrain the mind and form new habits, so I found it best to attack one line budget item at a time over the next few years.
The first thing I did was a budget in 2012. I saw the cruising Nick column and there was one item that stood out like a 100kg ballet dancer. FOOD. $1400 a month on food was such an eye opener for me when I first completed a budget. This was the first category to be cut. I immediately cut this in half by cooking at home more and being smarter with my supermarket shopping. The quality of my eating did not suffer at all so was not a big sacrifice to make. Annual savings $9,000.
Next, I sold my car as I started a new job with a company vehicle and phone provided. Annual savings of $4,800.
Then the big move. I sold my house. I went from a large 4-bedroom house (with rented out rooms) in an affluent suburb that was mortgaged to the hilt, to a small 89 square metre house in a less affluent suburb. This resulted in a lower mortgage, rates, maintenance, house and contents insurance, and less house furnishings. Annual savings $14,772. Let that sink in. One simple move has saved me $14,772 per year. Even more once you consider any investment returns I can make on those savings.
Now it was time to focus on repetitive monthly bills such as electricity, TV, and internet. I cancelled SKY TV and I phoned my electricity and internet providers asking for cheaper rates. I was not hesitant to change providers if I needed to and I got good results. Annual savings $2,400.
Through the process of focusing on improving the budget I was able to find $31,000 of savings. That is $31,000 per year I now had available to invest or pay down the mortgage.
Many of these changes have caused me no deprivation at all. Budgeting is often equated with deprivation, but living in a smaller house really is no burden. It is actually less of a burden than a larger house. Having friends over for dinner has replaced my need for entertainment in town. Changing internet and electricity providers has made no difference to my happiness. As has cancelling the gym or any of the other cuts. I would in fact argue that my life has improved as it has been simplified.
When we get new jobs with higher pay we tend to increase our spending as well. I did this all through my 20’s and early 30’s. This is called lifestyle inflation. When we do this our savings rate does not improve at all even though our income is increasing. It’s because our expenses are increasing at the same rate. This was me in 2011. A doctor earning $200,000 per year with a savings rate of 5% is no better off than a janitor earning $30,000 with a savings rate of 5%. Income is not everything. It’s all about the savings rate.
The key is to increase the gap between expenses and income as much as you can without impacting on your present day happiness. The only way to do this is to avoid lifestyle inflation. I could cut down my supermarket spending even further but doing so will decrease my happiness. I have found the point of equilibrium where more spending will not bring much more happiness, but less spending will decrease my happiness. A good budget should balance your present day needs with your future goals without depriving yourself of either.
I have everything I could possibly need. A loving family. Good friends. A fantastic home. An abundance of food and unlimited internet. We live in a country with plenty of free recreational activities. I certainly don’t feel deprived because of budgeting. I feel enriched.
My expenses will be increasing this year as our baby daughter came into the world. I will either adjust my savings rate expectations or seek to earn more income. The problem with more income though is time away from family which is very important to me. That is why financial independence is such a worthy target to have, because then our time becomes ours to do as we want.
How you create a larger savings rate is a personal decision. Some find it easier to reduce expenses. Some find it easier to increase income. Ideally, you can do both.
The information contained on this site is the opinion of the individual author(s) based on their personal opinions, observation, research, and years of experience. The information offered by this website is general education only and is not meant to be taken as individualised financial advice, legal advice, tax advice, or any other kind of advice. You can read more of my disclaimer here
Do you have a story to share on how to cut costs or earn more income?