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If you're planning to retire early, one of the, if not the most important thing you're going to need to know is how much money you spend now, what your FIRE number is and how much money you can save to get to it so you can actually quit the 9 to 5.
This means you've got to use the B word...
"BUDGET"
Now before I chose to go down the financial independence rabbit hole, budgeting was a fairly alien concept. It's simple right? You get paid, you spend that money every month and if you run out before the end of the month you take it a bit easier and whack all the essentials on the credit card and repeat that process until either:
The credit cards are maxed out and you are forced to reduce your spending
You get some kind of work bonus / windfall / inheritance that lets you reset the process
You lose your house and all of your possessions and live on the streets
It sounds crazy when you write it down but that was my approach to budgeting for the first 40 years of my life and is also the same for, I would guess, 70%-80% of working adults. I was lucky that I always paid into pensions and investments before I got my hands on my salary so was still building up a bit of a retirement fund even though it was fairly unconsciously.
Luckily I saw the light (or the fire) when I discovered the world of financial independence and decided to retire early but still managed to leave the budgeting part until later which I really regret now as I could have probably retired about a year earlier. I simply tried to spend less and to some extent that really worked and we soon had a savings rate (the percentage of your income that goes towards your retirement investments) of around 50% but it was pretty miserable as I just became tight-fisted and wouldn't spend money on going out, or takeout food or basically anything I thought I could go without. Deprivation was the order of the day.
After I fell ill in early 2019, I had a fair bit of time at home recovering and I must have been pretty bored because I set about getting a proper budget and analysing our spending more effectively and the result was amazing. Suddenly I could see where my money was going and it became clear that denying myself the odd pizza, new T-shirt or a night out was not where the solution was and before I knew it, we had got up to a 75% savings rate without living on gruel and sitting in our coats to reduce the winter heating bill!
Our money was going on subscriptions we didn't need or use, over subscribing on the things that we did ( we had a 300mb internet connection at one point, just why?) , over shopping on groceries and filling the bin with wasted food every week and then being lazy about things like insurance and just accepting 10-15% increases year after year without shopping around.
We just weren't woke!
I've done other posts on how we cut down the bills but this post is about making your budget, not reducing your spending. so here is how we did ours and then a breakdown of our spending now I'm "Post FI" and Mrs H is still working.
So right off the bat, you need to start tracking your spending. There's tons of free online trackers that do this and if you're in South Africa, the best one I've found is 22Seven. It's super simple, you link your bank accounts to it and then it automatically downloads your transactions and you tell it what you spent the money on. Every time you do that it learns and before long apart from the odd anomaly here or there, it pretty much takes no effort.
Once you've been doing that for a little while (at least a month bust preferably 3-6 months) you can start to see where your money goes and what it gets spent on. prepare to be surprised if like me you kind of watched it though one half-closed eye previously. Then it's time to come up with 4 magic numbers:
How much you currently spend each month on average
How much of that goes on things you have to pay to live e.g. rent, electricity, water etc. = NEEDS
How much of it goes on things you're not willing to give up or reduce = WANTS
How much you can put into savings if you limit your spending to just wants & needs = SAVINGS
And then it's simple: WANTS + NEEDS + SAVINGS = BUDGET
Make sense?
So let me show you what that looked like for us when we embarked on saving for early retirement
Average Pre-FIRE monthly spending - R164,000 / $10,250 / £7,885
Unavoidable Bills - NEEDS = R32,000 / $2,000 / £1,500
Things that we're not willing to give up = R62,000 / $3,875 / £2,980
Monthly surplus to go into investments = R102,000 / $6,375 / £4,900
FIRE Savings Rate: 62%
Now let me pre-empt what some of you will now be thinking:
"I can't retire early because I don't bring in anywhere near that kind of income, this guy is an idiot!"
And if you are thinking that, you're focussing on the wrong thing and it's that that will stop you from retiring early not your salary. It doesn't matter if you earn millions a year or thousands, the important part is what your savings rate can be. If it's zero, then I'm sorry, you need to get a better paid job or spend a lot less, you are going to be working forever. If you can get it to 10%, then congratulations, you're on par with most of the rest of the working world and you can hopefully have enough money to stop work in your 70's. If it's 25%, you can look forward to retirement with a few years of being fit enough to enjoy it properly at around 60. At 50% you're looking at retirement in less than 10 years. If you're saving rate is over 60%, you want out and you want out as quickly as possible, keep it up and you'll be done in 3 to 5.
The important bit is not how much you earn but how much less than that your lifestyle costs.
OK I'll stop preaching now, if you want it enough, make a plan. Back to the point of the story!
So what do we spend our money on?
Let em start with the NEEDS, unavoidable bills, the bit keeping you off the street, having worked hard for many years to pay off my bond/mortgage early we're pretty lucky in that department:
Water Electricity & Rates = R4000 / $250 / £200
Car & Home Insurance = R3,000 / $188 / £144
Medical Expenses = R1,500 / $93 / £72
Bank Fees: R315 / $20 / £15
Transport & Fuel = R2,000 / $125 / £100
Household Maintenance & Unexpected Bills = R5,065 / $313 / $240
Home Security Monitoring = R120 / $8 / $6
Groceries = R16,000 / $1000 / $770
Total = R32,000 / $2000 / £1500
Groceries may look like a big number but this is everything we buy from the supermarket including, food, drink, cigarettes, cleaning products, pet food and toys, if it goes in a trolley, it's in the grocery budget.
Then we have the WANTS, the things that make life worth living and the comforts of home:
Mrs H "Fun Money" to spend on herself - R10,000 / $625 / £480
Mr H "Fun Money" for my personal spending - R10,000 / $625 / £480
Gifts for friends - R500 / $31 / £24
Cleaning & Gardening Service - R4,000 / $250 / £200
Internet - R1,200 / $75 / £58
Netflix, Youtube Premium & YouTube Music = R300 / $20 / £15
Takeout Food = R1,000 / $63 / £48
Entertainment = R2,000 / $125 / £100
Unplanned Spending = R1,000 / $63 / £48
Total = R30,000 / $1875 / £1440
Grand Total = R62,000 / $3,875 / £2,980
And that's about as complicated as our budget gets. There's a couple of points that probably need a little clarity if you're currently trying to figure out your own budget:
Medical Insurance - Unfortunately in South Africa that's a necessity if you can afford it unlike when we lived in the UK where medical care is free. Mrs H currently gets cover for both of us deducted from her salary so that will be an extra NEED when she joins me in retirement so the budget will go up by approximately R5,000 / $313 / $240 every month.
Cell Phones - The eagle eyed amongst you will see there is no cell phone costs. That is because we include that as part of our personal allowances (the Fun Money). I'm over having the latest phone and am very happy with a decent chinese import every couple of years where Mrs H is slowly being weaned off a decade of iPhone addiction by me telling her if she wants the latest iPhone, she can pay for it out of her own money!
Transport & Fuel - This is currently a little low due to COVID-19 and the recent lockdowns. We normally spend much more on fuel although what we've saved on fuel we've spent on increased grocery costs from being at home having 3 square meals and endless coffee instead of grabbing toast and on the way out of the door.
Water, Electricity & Rates - We used to spend a lot on electricity but I invested in Solar panels in January this year so electricity costs are almost down to zero, this knocks about 30% off this category so if it looks low to you, that's why.
Other than those couple of bits, our budget lets us live a pretty abundant life right now although regular readers will know I have been blowing the budget recently due to house renovations. I would expect the budget to change dramatically when Mrs H retires as I'm hoping we can do a lot of travelling. I wouldn't expect it to increase spending that much as we'll consider airBNBing the house out whilst we're away to fund travel but what we spend money on will be a lot different I suspect.
The other question I get asked a lot about retirement is if your spending goes down a lot when you retire. I would say yes and no to that. You definitely reduce spending on fuel, work clothing, all those coffees and lunches at work, after work drinks, birthday contributions etc. That all mounts up. Maybe it's because I'm only 7 months in but I do find I spend more on my hobbies like woodworking tools, computer stuff and that kind of thing but perhaps that will wear off over time once I have all the tools and gadgets I need!
So of those of you who like a good graph, here is a breakdown of our 2020 year to date spending in a spiffy pie chart:
I guess in summary, budgeting is not fun and sexy I'm even feeling like a little snooze after writing this post (so thank you if you read this far), but it is one of the cornerstones of the FIRE concept and if you want to retire early it's a necessary evil until you have more money than you can spend.
My one piece of advice for anyone on the FIRE journey is to make your budget realistic, what's the point in retiring and not having any money to do anything with your time. That's just being unemployed. And don't make a budget that you can't stick to, the only person you're lying to is yourself and the outcome is going to be needing to get a a job a few years after you retire.
Most importantly, once you know your budget, you know your FIRE number ( the amount of savings you need to retire) and if you follow the 4% rule like most FIRE enthusiasts, you simply take your monthly NEED+WANT budget and you multiply by 300. Simple as that.
Our FIRE number is R18,600,000 / $1,162,000 / £894,000.
As I type, and at today's exchange rate, we've got R14,859,149 / $971,186 / £747,063 so we're a bit of a way off yet, but I knew that when I retired.
"The side hustle will provide" - Hopefully!
I know this post won't be everyone's cup of tea but when I was putting together our FIRE plan I really didn't know how to approach budgeting so hopefully it's useful to someone and it is often something I get asked about.
Think I'm doing it wrong? Got a better way? have a question? That's what the comments section is for, feel free to comment and share your opinion or question, everyone benefits from more voices.
Until next time, keep living.