Toward Financial Independence, Part 1

When I announced my plan to quit my job and travel, a lot of people expressed surprise, many were envious, and only a few asked how I could do that. In the weeks and months that followed, a few more have asked how I’m able to do this financially. I’ve directed them to various resources: websites, blogs, YouTube channels and podcasts. These resources encourage financial independence to give you the OPTION to design the life you want.

Choose your Own Adventure

Not everyone’s goal is to travel. The financial foundation that allows me to do that could allow you to do whatever it is you want to do. Start your own business; go back to school; take a sabbatical; leave a job where you’re underpaid or under-appreciated, leave your children a financial legacy, and so on. Your goals may not be my goals, but financial independence gives us both the chance to pursue what matters to us.

Another thing some people have said to me is that they are too old to get started. That’s just not true. There is no age barrier; everyone’s path is different and everyone gets to FI in their own way. Yes, some people start in high school and reach financial independence by their early or mid-twenties. Some people reach it in their late-fifties. Some people reach their “number,” but love their jobs and choose not to retire early. They just like to know that they can. It also makes working at your job a choice and not something you have to do. If a situation turns sour, you have the ability to get yourself out.

All this is to say, I strongly encourage everyone to take stock of their financial picture and take steps toward financial independence, whatever your long-term goals are. Since it’s the beginning of a new year, now is a great time to start on this road.

Great, thanks for that advice. How do I get started?

Yeah, that’s the million dollar question isn’t it? Or 2 million or whatever your FI number is. And that’s the first step. In order to start heading toward financial independence, you need to know your FI number. And to know your FI number, you need to know how much you spend in a year. NOT how much income you have. This will of course be important and we’ll get to that later, but for now, you need to determine how much you spend. And not how much you THINK you spend, but how much you ACTUALLY spend.

Step 1: Track your Expenses

I’m writing this the first week of January, but even if you read this in July, start now. Track your expenses for the week, then the month, then for two-three months. Track everything, even if you have an outlier big purchase (new refrigerator), or you are buying something to use in the future (airline tickets for a family trip). It will all go into the annual budget, so keep track of it all. After a few months, you should be able to see some patterns and have a general sense of where your money is going.

There are a number of websites you can use to track everything. Your bank may have a page where you can link outside accounts and it will give you your full financial picture. Your online brokerage may also have this option. There are also free websites including Mint and Personal Capital* that will do this as well. I have used all of these methods and I preferred my bank’s financial picture webpage until they changed the format last year and since then I’ve been using Personal Capital more. It’s all personal preference.

All of these options make it easy to aggregate your accounts (including banking, investments, credit cards, and loans) in one place so you can see your full financial picture. They will also keep track of your spending and provide pretty graphs and spreadsheets categorizing expenses. You may be surprised by what you see.

You do have to link your accounts together and link them to whichever website you decide to use. If you’re not comfortable doing that, that’s fine, you can use Excel or Google Sheets to manually track all of your expenses. Or you can use pen and paper. Whatever method works for you.

Don’t Cheat!!

It might be tempting as you see your expenses pile up to remove certain things, or make an excuse why something should not be included. If you start making exceptions now, you will always find things that you think should be excluded, and you won’t get a true picture of your spending. Because that’s the point of this exercise: to get a true picture. You’re not creating a budget right now, you’re not trying to make cuts or save more, you are trying to get a good understanding of where your money is going.

The point of financial independence is not to live on a shoestring budget, spending as little money as you can. No, the point is to know what your life costs and have enough to support that in perpetuity. Your life in retirement may cost more or less than your current lifestyle, but until you know what your current lifestyle costs, you can’t determine your FI number. So be honest about your spending while you are tracking everything for a few months. Let me know how you’re doing, and we’ll move onto the next step once you’ve had a chance to honestly assess your monthly spending.

Extra Credit

One of the websites/blogs/podcasts I direct people to when they ask for resources is ChooseFI. I just listened to their first episode of the year and they introduced a new, free, program they have: The FI Pathfinder. This will direct you towards their various resources based on what topics you are interested in learning about. Again, it’s free, and seems like it will be a great way to get started with their content. If you are really interested in pursuing financial independence, this is a great way to get started.

*This is an affiliate/referral link. If you sign up using this link, it will cost you nothing, however I may receive some recompense. I would not include this link if I didn’t support this product.