Start your FIRE Part I – Making a budget and tracking expenses
Welcome to the first in a series of posts called which I’m going to call “Start your FIRE”. I wanted to lay down a basic framework for new readers of the blog to read through, just in case they’ve never read a blog about Personal Finance before, or are just getting to grips with this idea of Financial Independence and could do with some pointers in how to go about setting up ones life to achieve this. Whereas my first few posts were looking into the possibilities of FIRE available to us in the UK, think of this as the nuts and bolts of how to start “doing it”.
Part 1 – Making a budget and tracking expenses
You won’t find a personal finance blog that doesn’t recommend that you either make and stick to a budget every month, week, or otherwise somehow track what you have been spending. There is often much debate over which is better, budgeting up front and “sticking to it” or looking back at what you’ve spent and taking stock for next month, but really this is purely academical, so I’d say do whatever works best for you. The key point is with either method you should be 100% aware of where your money is going. If you combine this with setting yourself a savings goal, say 50% for example, then you will quickly start to think twice before any impulse buys. When you think you get to a point where there is no fat left to trim, I almost guarantee you will think of or find a way to do so. After a while you might well notice yourself graduating through the three stages of budgeting, which I would say look roughly like this:
1. Making a budget (and sticking to it!) – You create your budget with set amounts for all your set bills such as Mortgage, council tax, and a good estimation of those that can be variable (Mobile/Phone bill). Most people will also allocate a set amount into various categories which all fall under a blanket of what you might call luxury spending, which is clothes, the gym, entertainment, and so on. You check your budget regularly and fill in the expenses column diligently to see how you are doing as you don’t want to go over budget. You may start to think more about each purchase you make, whether it is completely necessary. If not you might put it back on the shelf. If so you might try to find the same or a similar product cheaper. You might also want to add an entry for a set amount of cash for savings or investments, and make sure you transfer this set amount of money at the start of each month. This system works well for most people who have just been introduced to budgeting as you “pay yourself first” – in other words you sock it and lock it* away in savings before you can spend it. I would imagine that savers at this level are saving between 0% and around 30% of their income.
2. Tracking your expenses – There is no budget per se as you’ve moved beyond having to allocate a certain amount of money for luxury items such as clothing, the gym, entertainment etc, and the only real reason you need to keep a track of things is to do some fine tuning. It’s obviously also nice to keep a record of everything, in case there are any anomalies on the bank statements. Also it’s a good idea to know what is left at the end of each month so you can sock it and lock 😉 it into your savings or investment accounts. As you have no set budget amount as such, this can be variable, but in general terms you know that the amount will be at or as near as possible to the highest amount you could save, with respect to your circumstances and the savings goals you would have set yourself. I would imagine most people at this level are saving up to 50% of their income if they had anything around the median level or greater.
3. Frugal expert – I have clearly not reached this stage so this is purely conjecture, but I would imagine that there are Frugal dynamo’s out there that have just done away with any kind of tracking at all, perhaps because they do not own a computer to run a spreadsheet, or maybe even do not have need for a pen and paper in their simplified zen style lives. If you meet anyone like this (or are one!) then I’d sure like to hear about it.
In terms of actually creating and filling out your first budget… I have a google spreadsheet in the making which I will post tomorrow for you to play around with, with some brief instructions on how to fill it out. Hopefully this will help a few people out in starting their FIRE.
And finally, good news! If you are even at the beggining of stage 1 you are already more financially aware than 90% of people in the country right now, and also well on your way to living an affluent life.
Patience and sticking with it is the key from here on in.
*That could be my first catchphrase for the blog christened right there… I like that quite a lot in fact 🙂 Back ↑