Hi all, Mr. B here again. Now that you understand the concept of financial independence and what it means to us, I will share our day to day operations for becoming financially independent. We do not want to preach to you the “Two Ambitious Barracudas” gospel. Rather, give you insight into how we do things, and hope that you might pick up some pointers if this financially-free lifestyle appeals to you. Ultimately, you must decide how the process will work best for you, as we have decided for ourselves.
As I mentioned in the previous post, what we do is not brain surgery, but it does take a lot of commitment, time and effort. I wasn’t kidding when I said that the most important first step in financial independence is “knowing your numbers”, and specifically your “cash flow”. Before you start saving or investing, you need to know where all the money is going. I find that this step is usually ignored by most people, while I consider it to be THE BASIS for which financial independence is achieved. If I were to ask you what the balance of your 401K or bank savings account is, you would probably be able to give me a pretty accurate estimate within a few seconds. But what if I asked you about your average monthly spending on entertainment like going to the movies or out bowling on a date night? How about what you typically spend every month on dining out (restaurants, lunch breaks at work, Starbucks runs, etc)?
$309.40… That is my answer!
This is our average monthly spending on dining out/entertainment over the past 12 months. How did I come up with this number so quickly? It was easy. I just opened my huge 3 ring binder that I carry everywhere I go, hauled in an over the shoulder canvas satchel. Once I’m ready to complete my purchase, I simply place the binder on the counter, open to the current dated page, ask the cashier to repeat the full cost of the purchase and enter it under the proper spending category. That’s it! Simple, right?
Hopefully by now you have caught on to my sense of humor. Well Mrs. B thinks I’m funny anyway. But in all seriousness, we really have spent an average of $309.40/month on dining out over the past 12 months, and it took me about 4 seconds to give you that information. I simply picked up my Iphone, opened up the “Prosper Daily” app, put my thumb on that neat little finger scanner thingy, and there it was! It also shows me how much we’ve spent on gas, utilities, insurance and everything else that drains our bank account. I use this particular app because I find it to be the simplest and easiest to use to track spending, but there are countless others on the app store for both Android and Iphones.
Why do I think knowing this number is so important that I decided to make it the first step in my financial independence blog posts? Because, if you don’t know how much money you are spending, then it’s not possible to know how much in assets you will need to accumulate in order to reach financial independence. The second, and equally as important reason is because this will help you to reduce your spending and decide where to prioritize your precious resources.
For example, about a year ago, Mrs. B and I were carefully looking through the spending tracker trying to find ways to decrease costs and increase savings. We decided to review how much it was costing us both to buy lunch every day at the office. We were always hesitant to cut spending on this because it seemed like such a chore to prepare lunches every single day before work, in between taking showers and trying to get the kids ready. When I ran the numbers though, I found that we were spending approximately $10 each per day at the office cafeteria. Between the two of us, that’s $100 per week or $400 per month or $4,800 per year or $48,000 over the last decade, in which we have been working. Needless to say we decided to suck it up and start packing lunch every day (other than the occasional restaurant outing with coworkers). Oh how I wish I could go back in time and add that $48,000 back into our portfolio. It may mean a lot of PB&Js going forward, but it’s okay, I love PB&J, and I love $48,000 even more because it will bring us that much closer to freedom.
Now I don’t want you to think that you have to immediately stop buying lunch at work. What I’d like you to do is make your own informed decisions once you have the data. Decide what is really important to you with the understanding that every dollar that flows out of your pocket will ultimately delay your financial independence day.
So, before moving on to bigger and better things, stop reading this right now, go download the free “Prosper Daily” app or one like it and I’ll wait right here for you to come back…
…Wow! You must have a really slow internet connection, but I’m glad you finally got it. Go sign up and link your credit cards and your bank accounts and that’s it. Now go about your everyday life and spend money like you always have. It will take a month or two to really get an understanding of where your money is going, and to start seeing trends. At the end of each month the app will show you exactly how much you spent. This is great news! You have obtained the HOLY GRAIL of financial independence data: Your monthly expenses number! This number will obviously change from month to month, but over the next 6 to 12 months, you will be able to calculate an average and see where it is trending…hopefully downward.
In my next post, I’ll discuss what to do with this vital data now that you’ve acquired it, and how it will begin to reveal your path to financial independence.