My blog is not really a blog for beginners.
There are plenty out there that cater to personal finance newbies. This is more a MY PERSONAL finance journey, the reader comes along for the ride. I did decide it was probably a good idea to include at least one basic all encompassing ‘How to‘ Achieve Financial Security. This way when I refer to various FIRE concepts that might be somewhat more advanced everyone will have some idea of where I am coming from.
So if you are new, WELCOME, and in no particular order;
Data – You need more information. Get a pad of paper and a pen, we need to do some serious recon. The map of your financial life is just that, a map. It is probably not that complicated yet, but you may not know the true shape of it. The hidden corners. First thing we need to do is gather information to see what we are dealing with.
Numbers – The accuracy of this map and therefore the accuracy of the plan we are forming needs to be based upon accurate information. By that I mean NUMBERS. We will gather up the actual pieces of paper, or in this day and age, create an account on the website and write down the numbers on the screen. Here are the various families of numbers we need to collect.
Let’s tackle the notion of Budget Numbers FIRST.
Numbers In – We need to take down what money is coming in and from where. The main thrust here is current paychecks. Grab your pay-stubs. Also think through if you have any other sources of income (money coming in) that are not covered by a traditional paycheck. This category also includes interest, rebates, any guaranteed steady streams coming in. DO this for a one month basis.
Numbers Out – This is the money that goes away (to someone else) every month. Bills paid, debts paid. Any fixed numbers include here. We will get to the variable stuff in a minute. Don’t forget to add the ones you pay on an irregular basis, like if you pay car insurance every 6 months, right down 1/6th of that number for your monthly amount.
Variable Numbers – These are the expenses that change month to month. Like a grocery bill. It is not fixed, so you will have to estimate it. Even if it takes you a few cycles to get a good handle on what the average monthly amount is. It is OK to create some generic categories here like, ‘entertainment’ or ‘dining out‘.
Budget – What you just did with gathering all of your numbers is the skeleton outline of a functioning budget. Just combine the figures, all Numbers coming in as ‘income’. All the Numbers going out as ‘expenses’. Try putting everything together to see where you are at. Hopefully it is not a monthly deficit, but a surplus.
Now for what to do with your new Monthly Budget.
Tweak – The point of doing the budget is to get a feel for the comings and goings of your money. It should now be easier to see where your spending problems are coming from. Look for the leak in your budget and plug it. There is always something you can cut back on.
Revisit – Many of your bills are higher than they need to be. Maybe the introductory period has worn off. Maybe the rates just naturally creep upward. Many types of bills, like insurance are designed with a built in increase in rates over the years. They are hoping you are too lazy to do anything about that. Go through your bills one by one seeing if there is anywhere to trim the fat. Things like insurance rates can be drastically lowered by switching carriers. Is that TV package really the right fit for you? Can you bundle several services?
Automate – The easiest way to save money is to do it automatically. Cut the human nature part out of the equation. Your paycheck can be divided up into multiple direct deposits. Put your savings on autopilot and hide money from yourself to stave off impulse buying. HR departments at work will help you do this. If you can not automate at your job, then start using an envelope system. Literally stuffing cash into envelopes based on what you have that money earmarked for. Impulse control and frugality go hand and hand.
Onward towards Comfortable Retirement.
Diversify – When choosing your retirement vehicles, you want to diversify so that when any 1 part of the economy takes a dive, it won’t tank your whole nest egg. This is key to maintaining Financial Security. You need to pick a healthy mix of stocks, mutual funds, cash, and bonds, but also types of stocks/mutual funds. Index funds are good. Age based funds are no-brainers if having too many choices is freaking you out. Real estate is great, but more complicated. REITS (Real Estate Investment Trust) are a different way to invest in real estate without all of the landlord hassle. REITS can be bought/sold just like a stock or mutual fund. Start slow and simple, build more complex structures as you get more comfortable.
Fees Suck – Every bit you pay in ‘fees’ is that much less you get in returns. Fancy funds have high fees because they are ‘managed’. That does not mean they are better. Look for low fees and look for funds that are spread across large swaths of investments. Vanguard is great. You should not try to beat the market, you and me are not that guy.
General Life Modifications.
Lifestyle Creep – As your financial foundations become firmer, you will be tempted to also inflate your lifestyle. You have more money so you should spend more money right? This is known as lifestyle creep and it is a killer of wealth accumulation. Be on guard for it and make a conscious decision how far to let it creep.
Live a Little – Lifestyle creep not withstanding, what are you doing all of this for? Go ahead and reward yourself a little. FIRE is a long range plan. You need to celebrate the milestones in order to keep up morale. If you are squared away then maybe it is OK to upgrade some aspects of your life, in moderation of course.
Frugality – You need to determine just how frugal you want to be. Yes the more frugal, the faster the timetables, but also the sparser the lifestyle. I for one like to go for the mid range shelf. Not the cheap stuff, not the high end name brand. Solid middle ground. When you hire a contractor, get 3 bids, but don’t always just pick the cheapest one.
Can you increase the good as well?
Raises – You can only cut expenses so much. Lower spending without increased income just means you are good at being poor. We need to take a look at the amounts and sources of money coming in and see if these can be accelerated. I do not push for ‘side hustles’ very hard, but that is a great way to bring in extra income. The best way is to change your job or get a raise at the job you have.
Eat your Raises – One great way to save money is to not increase spending even when you get a pay raise. You are used to your monthly budget, so just keep those limits right through a raise. Put the additional funds straight to your savings and/or retirement vehicles. Also you should budget off of 24 paychecks, 2 a month, even if you get paid every two weeks. This will lead to 2 extra paychecks every year that are not accounted for in your budget. A great way to catch up on some necessary expenses or to beef up your savings/retirement.
Your Legacy and the Final Stretch towards Financial Security.
Goal – After you have been at this awhile, you need to reassess your goal. Maybe it still is to ‘quit working ASAP’, maybe it has evolved. Having a clear understanding of what you are shooting for will allow you to adjust the goal posts and fine tune the master plan.
Using the 25 year rule and the 4% rule, you can come up with your final numbers and get an accurate ‘out date‘ for the whole FIRE thing.
Final Numbers – Once you calculate your predicted annual expenditure in retirement, you need to multiply that times 25 to get your Retirement Nest Egg figure (this is the 25 year rule). Remember your spending in retirement will likely include less expenses than are currently in the budget, like kids growing up and moving out or having a mortgage finally paid off.
Keep in mind that any future payments, like Social Security or a pension will be added in to bring down the amount you need to retire. You should count on living off of those income streams plus a 4% draw-down of your Retirement Nest Egg. This way you do not eat into the pile of retirement money, you live off the cream. (This is the 4% rule.)
Empire – Now you get to think about your legacy and what you will be leaving behind you after you are gone. Some people want to spend all of the retirement money themselves. The 4 % rule spelled out above should allow you to leave a nice inheritance to your heirs. Planning ahead does not need to be done right out of the gate, but if this is important to you, it is a prize to keep your eye on.
Financial Security could be a generational reality.
Parting Words on Financial Security.
Trim the Fat Again – You are never done tweaking the numbers. Every so often you need to go back over everything and see where you can continue to streamline. This is not a quick fix program, it is a lifestyle. Two ideas here. First, if there are 2 competing cable companies you can always quit the one you have in order to get the great ‘start up’ deal with the other one. Playing companies off each other is time consuming, but has a tangible payoff. Second, hustling credit cards to get the new rewards programs is very useful, provided you are paying off the balance every month. No interest fees, EVER.
Read and Learn – Your brothers and sisters in the online Personal Finance world are here for you. And we are growing all the time. Nobody taught me this stuff, I learned it over the internet. A wealth of information about wealth is available for anyone with the time and inclination.
Leap of Faith – Get started, there is no better time than now. And that is an actual mathematical fact because of the numbers. You are the you that you have been waiting for. Seriously.
When you get more comfortable with the vocabulary of FIRE, make sure you check out this Reddit thread and read through the whole right side of the page.
Go ahead and Add anything you think is relevant to the comments, this could end up a Choo-Choo train of financial wisdom for pursuing Financial Security.