In the first article about financial independence, we talked about your expenses, including the little things like coffee and bread, right up to utility bills. There are three reasons I decided to start with outgoing expenses:
Firstly, most of us don’t recognize how important monitoring our expenses is. We imagine our spending problems would be solved if only our income was higher. But this is rarely the case. Studies show that most people, when they receive a raise, simply start spending more money.
Secondly, our expenses are usually more immediately possible for us to change. Consider how easy it is to switch to $2 instead of $20 shampoo. Even the most die-hard hair product fan will surely agree, it’s far easier than convincing your boss to give you a raise of 10x your current salary, or to sell 10x the number of tickets for your play.
The third reason cutting expenses is important? It’s mind-blowing. I’ll save that till last.
In the second article, we considered your income. Both how much income you have, and how many streams of income you have.
Here, we’re counting anything that makes you money. Working at the school tuck shop. Selling a painting once in a while. Doing some out-of-hours consulting. Rent from your spare room. Whatever it might be.
Because when it comes to building financial independence, there are three magic numbers to start with:
Your three magic numbers
- How many sources of income do you have?
- What is your total income?
- How much are your outgoings?
Take some time to work these out. (If you haven’t already, you might like to download the spending plan to help)
Now, ask yourself the following questions:
- Does the majority of your income come from one source?
- Do you have all of your money in the one account?
- Are you considering any big purchases or upgrades?
If you answered ‘yes’ to any of the above, click through to my article on diversification now.
How is your budget?
Is it in the black? (Are you earning more than you’re spending?) If so, you’re in a great position to go on with the next step.
Is it in balance? (Are you spending all that you’re earning?) If so, you’ll be ready to go on with the next step once you free up a bit more cash. Look over your spending plan and consider what changes you can make.
Is it in the red? (Are you spending more than you’re earning?) If so, keep reading! You’re far from alone. Estimates suggest that as many as 80% of Americans are in debt, and Australian households have some of the highest levels of debt in the world.
Here are some resources to get you started
When it comes to income, both how much income you have, and how many streams of income you have are important. But when it comes to debt, how much debt you have is far more important than how many creditors you owe money to. Here’s why – and how you can figure out which debt to pay off first. It’s a long video, but it will provide you with a comprehensive plan for kicking your debt to the ground – and potentially save you tens of thousands of dollars and years of your valuable time.
And some resources to keep you motivated…
Once you’ve got a handle on how you’re going to eliminate your debt and supercharge your savings, head on over to the next step. Even if you’re not ready to take it yet, it’s good – and exciting – to know where you’re headed.
And speaking of exciting, remember that third reason for looking at expenses I hinted about? Here it is:
If you know what your annual expenses are, and you get them down as small as possible, all you have to do is save and invest 25x that amount and you can achieve financial independence. Here’s how.