Consider this as Part 1 in the financial independence (FI) journey I have undertaken. If you want to become financially independent, then you need to know how much money you need to earn/save to cover your monthly expenses.
Why Should I Track My Expenses?
If you have no idea how much you are spending each month then you cannot possible expect to become financially independent – unless you are the 1% of people on a top rate salary and you can’t spend your money faster than you can earn it.
Tracking your monthly expenses helps you to understand how much of your monthly income you can expect to save each month – the more accurately you track your expenses, the more you know about how much you are saving each month.
My first step was to switch to using a current account which provides lots of useful spending information – I chose the Starling Bank current account. As well being a useful card to use abroad, Starling let you easily see how much you spend on Food, Transport, Entertainment, etc. You can also track how much you spend with individual merchants – usefully for helping you realise that you have an unhealthy fried chicken addiction.
Record Your Expenses
Now that you have all this delightful spending information, it is time to record and visualise it. Yes, it is time to make pretty charts in Excel (Google sheets works well and it’s free)
You can start simple and build your analytics up gradually, what is important is that you subtract your total monthly expenses from your total monthly earnings. Once you have done that, set your monthly savings target and find your currently position to that target as a percentage. As you can see from the sample data above, this person is not quite hitting their target so they may look at ways to reduce their monthly food bill (possibly start by eating less fried chicken)
Extrapolate your data
Record your data as the months go by and you will slowly start to build a more accurate annual average or your spending and saving rates. From there you can calculate what you saving should look like in 2, 5 or 10 years time. Information is power and once you have this, you can start to assess and plan how you can improve you financial standings.