This is the first instalment of a two-part series on reducing your expenses to achieve Financial Independence Retire Early (FIRE). Part 1 looks at the importance of tracking your spending, while Part 2 focuses on cutting unnecessary expenses and creating a realistic budget.
Lowering your expenses is the most important step towards early retirement. As a general rule, you need to start by tracking your expenses. Once you know where your money is going, you can figure out what to axe, trim and keep.
When it comes to films, action has to be my favourite genre hands down. Eighties action flicks are the best. Rambo fans, anyone? Now, imagine this. I did a search for action films on Netflix recently and about half the suggestions were CGI-laden superhero crap. I was immensely irritated. Since when superhero movies are action movies! I AM SO SICK OF SUPERHEROES! Small wonder that I hadn’t been to the cinema for more than a decade until ‘Top Gun: Maverick’ lured me back in June. For almost two hours, I felt like a teenage girl. Once again, Tom Cruise swept me off my feet and made my heart do somersaults. I wasn’t surprised when the film past a billion dollars at the global box office.
You might be wondering… what relevance does ‘Top Gun: Maverick’ have to the subject of discussion? Hmm…
You see, I was just thinking to myself the other day that the film’s roaring success goes to show that you don’t always need Batman, Thor and the likes to sell tickets. By the same token, you don’t always need a big fat pay cheque to retire early and comfortably.
CGI is impressive but a good plot is far more powerful. Similarly, a high income is awesome but keeping your spending under control is far more important.
After aeons of superhero galore, it’s about time Hollywood shifts its focus. Likewise, you need to divert attention to your expenses if you haven’t done so.
In this article, you will learn:
- Why Your Expenses Matters the Most if You Want to Retire Early
- How to Track Your Expenses
1. Why Your Expenses Matters the Most If You Want to Retire Early
Human beings, or rather consumers, love to buy stuff: fancy gadgets, trendy clothes, luxury cars and the list goes on. Many also will not hesitate to take on a huge mortgage and upgrade to a bigger, more expensive home the moment their income goes up. It’s not surprising that households are sinking inexorably into debt. Consumerism has become the way of life, but has it gone too far?
When you become preoccupied with acquiring material items, when you keep splurging instead of saving, when you keep taking on more debt than necessary, you are jeopardising your retirement and putting your future self at risk. True wealth is not measured by your spending. You need to stop accumulating stuff and start accumulating money!
True wealth is not measured by your spending. You need to stop accumulating stuff and start accumulating money!
The first step to improving your financial fitness is to reduce all unessential expenses, which includes paying off debt. If you’ve read my previous article on how to achieve Financial Independence Retire Early (FIRE), you will know that you should have at least 25 times your annual expenses invested in income-generating assets to be financially independent. How soon you can get there is largely dependent on two factors: (1) your annual expenses, and (2) your savings rate.
Reduce Your Annual Expenses
The lower your annual expenses, the less you need for your retirement. For instance, someone who spends $100,000 a year will need a bigger nest egg compared to someone who spends half that amount:
$100,000 annual expenses x 25 = $2,500,000 nest egg $50,000 annual expenses x 25 = $1,250,000 nest egg
Real Life Example: Believe it or not, Jacob Lund Fisker, the author of ‘Early Retirement Extreme: A Philosophical and Practical Guide to Financial Independence’ and a pioneer in the FIRE movement, was able to retire in 2009 at the age of 33 because he only spent $7,000 a year! Some people might criticise his methods as being too extreme but hey, the budget works for him and he is happily retired, so who are we to judge? I happen to think he is super cool! That’s a REAL SUPERHERO!
The whole point of citing Fisker as an example is to show the direct bearing one’s expenses have on his or her retirement. You don’t have to retire on $7,000 a year, so don’t start freaking out!
Increase Your Savings Rate
Needless to say, your savings rate will increase when your expenditure goes down. That means you have more money to invest for passive income, thus speeding up your FIRE process.
Real Life Example: Before we retired, Mr Wow and I ran a small business. Although our net business income grew year after year, we continued to maintain the same lifestyle and spend the same amount of money (our budget has not changed for years). By keeping our annual expenses low, we were able to stash away most of our income. We then invested our savings in equities and bonds.
Some people might find it challenging to cut their spending as they are too used to living a certain way. Adopting a different mindset helps. Don’t look at it as a sacrifice. Rather, look at it as a way to gain control of your financial situation.
2. How to Track Your Expenses
Categorise Your Expenses
To reduce your expenses, you should start by tracking them. By that, I mean recording every single purchase including insignificant ones that cost only a few cents. Classify them to make things easier. In case you need help, here are the Wow Family’s Household Expense Categories for your reference:
◦ Water, Gas & Waste Disposal
◦ Town Council Service & Conservancy Charges
◦ Internet Connection (fibre broadband)
◦ Mr Wow’s Mobile Phone Subscription
◦ Mrs Wow’s Mobile Phone Subscription
|◦ Mr Wow’s Whole Life Insurance
◦ Mrs Wow’s Whole Life Insurance
◦ Mr Wow’s Term Insurance (H&S, disability)
◦ Mrs Wow’s Term Insurance (H&S, disability)
◦ Home Protection Insurance (theft & fire)
|◦ Mr Wow’s Medical (family doctor visits and outpatient treatments not covered by H&S insurance)
◦ Mrs Wow’s Medical (family doctor visits and outpatient treatments not covered by H&S insurance)
◦ Mr Wow’s Dental
◦ Mrs Wow’s Dental
◦ Health Supplements
|◦ Ride-hailing Services
◦ Bus, Train & Taxi
|Food & Dining
◦ Dining Out
|◦ Consumables (e.g. fresh food, frozen food, detergent, toilet paper)
◦ Non-consumables (e.g. cleaning equipment, kitchenware)
|◦ Repair & Maintenance (includes replacing faulty white goods)
◦ Security (e.g. Ring Protect subscription)
◦ IT Stuff
|◦ Fitness & Sports (e.g. public sports facility entrance fee)
◦ Hair & Beauty Services
|Social & Leisure
|◦ Excursions & Outings
◦ Gatherings with Family & Friends
◦ Movie Streaming (Netflix subscription)
|◦ Special Occasion Gifts (e.g. birthdays, weddings, Christmas)
◦ Chinese New Year Red Packets
|◦ Flights & Transfers
◦ Tour Packages
◦ Car Rental
◦ Travel Insurance
◦ Miscellaneous (e.g. entrance fees, cover charges, tips)
|◦ Property Tax
◦ Income Tax
|◦ This category is optional and can act as additional buffer for unforeseen circumstances or a one-off expense (e.g. taking a hobby course)
► Certain categories, namely Healthcare, Household, Gifts and Holidays do not recur on a monthly basis. We have a yearly budget for them and spend as and when required.
► Although they have been budgeted, some expenses, e.g. Dining Out, are discretionary. We are so used to eating at home that we hardly dine out these days.
► Since we retired, we no longer earn taxable income, so the Income Tax sub-category has been empty for a while. By the way, capital gains and dividends are NOT taxable in Singapore.
Use an Expense Tracking Tool
There are different tools to help you keep track of your monthly expenses. When Mr Wow and I first started tracking ours, I took the lead and recorded everything on an Excel spreadsheet. Mr Wow took over the task years later and being the more tech-savvy one, he switched to a money management app known as Money Pro (by iBear LLC), which not only tracks income and expenditure, but also provides a breakdown on assets and liabilities. Every month, he (or rather the app) will generate a detailed report, making it easy for us to be fully cognisant of our finances.
Besides Money Pro, there are many other money management apps that you can download to help keep track of your personal finances. The free ones usually have limited features, so they might not meet your needs. Mr Wow downloaded and trialed a few money management apps before deciding on Money Pro. It cost a one-time payment of $0.99 then, but the price may have gone up since.
The app is pretty intuitive to use, easily customisable and synchronises transactions automatically between multiple IOS devices (e.g. iPhone and iPad). Synchronising daily transactions with your local bank may also be possible (you need to check if your bank is supported), but I believe it requires a paid monthly subscription. We opted not to subscribe to this service. Instead, Mr Wow diligently enters all discretionary expenses (e.g. dining out, shopping and excursions) manually into his iPhone. It takes less than a minute to enter each transaction, so do it on the spot. It will save you the hassle of consolidating your expenses at the end of each month. Recurring transactions, whether monthly or yearly can be automated within the app. The goal is to make tracking your expenses as effortless as possible.
Check out: Cash Stuffing Budgeting System: No Thanks!
After tracking your expenditure for a couple of months, you will have a clear idea of your spending habits and patterns. Knowing exactly where your money is going will help you identify the problem areas and decide on the expenses to reduce. The ultimate goal is to work out a realistic budget for yourself. When you are ready, read Part 2 to find out what expenses Mr Wow and I eliminated. You will be impressed for sure!