Budgeting for Financial Independence

Enjoy this guest post from longtime member and founder of the EconoMe conference, Diania Merriam. Diania provides wisdom on budgeting to meet your financial goals and how Republic Wireless can help you stick to your budget.

“A budget is telling your money where to go, instead of wondering where it went.”       John Maxwell

The word “budget” often makes people squirm.  For many, it brings up feelings of deprivation and restriction.  But if you’re pursuing financial independence, your budget can feel more like a close friend cheering you on towards your financial goals.

I like to think of my budget as a simple act of awareness around my money.  I started by tracking every expense to gain clarity on where my money was going.  From that position of clairty, I could then identify areas where I could cut back or where I could be more intentional about my spending.  The key for me is not just in developing a budget, but also continually engaging with it.  Every month, I evaluate how I actually spent against my spending plan and I decide if I need to make any adjustments to my budget.  I think the big reason why people get frustrated with budgeting is that they create a plan that is unrealistic. Then when they go over budget, it can be disappointing.  Evaluating spending against a budget often can help identify the areas where one is being unrealistic, and provide an opportunity to adjust accordingly.

One of the things I love about the FIRE movement is it provides a really clear target on how much you need to save to reach financial independence: 25x your yearly expenses.  Budgeting comes into the equation, because it helps you get really clear about what your expenses actually are, and thus determine the FI number you’re working towards.

That FI number, however, is only as good as the assumptions behind the number.  You need to be able to estimate your future yearly expenses, which is pretty difficult especially if you plan to retire young.  When you’re budgeting and tracking your expenses, you are able to look back at your historical spending over many years and changing circumstances.  This will allow you to come up with a better estimate on future spending.  For example, when I quit my job earlier this year, I looked back at my actual spending over the last 2 years to come up with a realistic budget.  This gave me confidence that I could take a big bet on myself and pursue self employment, because I could clearly see that I had a 2 year runway in liquid savings.  Having an intimate understanding of how I spend money, gave me clarity on how much money is actually enough for me.

Since my Republic Wireless phone is always on me, it has become a great tool for budgeting!  I use a free app called Spending Tracker, where I log every expense at the time I’m making a purchase.  This allows me to quickly look at how much I’ve spent in each category at any given time.  Then I can make informed purchasing decisions and ensure I don’t go over budget.  I also track my net worth on a free app called Personal Capital.  I’m literally able to look at my full financial picture at any time right on my phone, it’s very convenient!

Budgeting is a great way to help you understand your behaviors and preferences, and you can experiment with different levels of spending that will allow you to enjoy today, but also save for tomorrow.  If you find budgeting to be a painful exercise or a source of shame, this could be an indication that the gap between your income and expenses isn’t large enough.  In this case, it would serve you well to look at increasing income or take a hard look at spending behaviors.

Finally, a key benefit to careful budgeting is the opportunity to identify ways to reduce expenses.  And this can create what is known as a “double whammy” effect in your pursuit of FIRE.  Reducing expenses allows for more money that you can put towards investments now. But it also means that your FI number (25x annual expenses), is lower and therefore you’ll be able to reach your target faster.  When we first start engaging with a budget, we’ll find a ton of ways to optimize.  Perhaps we’ll find a cheaper place to live, save money by cooking more and eating out less, find cheaper home or car insurance, and change our phone plan to Republic Wireless (I did all of these things!).  But it’s easy to go on autopilot after that initial phase of optimization.  I would encourage us all, whether we started budgeting years ago or just yesterday, to continue to look for ways we can optimize expenses.  If we keep upgrading to more affordable ways to get our needs met, we’ll reach financial independence that much easier!

If you want to learn more about the FIRE movement, check out the The EconoMe Conference which is an event I created.  We just completed year 2 on November 13th and 14th at The University of Cincinnati. Stay tuned for news of upcoming events.