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  • Writer's pictureMr H

Working Out Your Early Retirement Budget

Updated: Jan 13, 2021

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...


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:

  1. The credit cards are maxed out and you are forced to reduce your spending

  2. You get some kind of work bonus / windfall / inheritance that lets you reset the process

  3. 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:

  1. How much you currently spend each month on average

  2. How much of that goes on things you have to pay to live e.g. rent, electricity, water etc. = NEEDS

  3. How much of it goes on things you're not willing to give up or reduce = WANTS

  4. 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

  1. Average Pre-FIRE monthly spending - R164,000 / $10,250 / £7,885

  2. Unavoidable Bills - NEEDS = R32,000 / $2,000 / £1,500

  3. Things that we're not willing to give up = R62,000 / $3,875 / £2,980

  4. Monthly surplus to go into investments = R102,000 / $6,375 / £4,900

  5. 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.

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7 commentaires

04 déc. 2020

Aha, thanks for sharing your approach. I really need to do more reading to understand the full tax implication, the various taxes (CGT, Tax on dividends, etc) and various tax breaks. One thing I am sure of is that all this new learning will keep me busy in ER 😊


Mr H
Mr H
04 déc. 2020

The tax is the bit I'm currently working on. When I left my job in April I had to sell a bunch of stock options and I paid 45% tax on the lot at point of sale, so I'm expecting that excess will cover this year in totality. However, from next year tax is going to be a much bigger consideration. most of my drawdown income will come from investments so it will be capital gains at 18%. There's a massive amount to figure out but rough math is that if I drawdown R744,000 (12 x R62,000 monthly drawdowns) at 18%, my tax bill will be roughly R90k after my R40k capital gains allowance. I'm not really worrying about the…


03 déc. 2020

I like the math around ‘interest earned’ on the total investment pot, and obviously live off some of that. I have done similar calculations which in my case works out to R1.2M per annum and then one has to draw down for annual living expenses. What I not factored in is the annual income tax one has to pay on the ‘income earned’ as all that interest will be deemed income. So x percentage , perhaps 18-27% will probably have to go to the tax man. How have you worked the income tax into your situation?


Mr H
Mr H
03 déc. 2020

A very fair question and one I also pondered for some time. What I'm about to say might not be the best thought through strategy in the world but it in my twisted logic mind I think it will work!

I'm planning to re-baseline at the start of every financial year and include major purchases including events, holidays, cars and renovations. I pretty much did the whole thing as soon as I pushed the FIRE button so round 1 is complete.

What I mean by re-baselining is that I'll deduct money for planned major one-off purchases from the total pot and then re-calculate the 4% for the following year. Whilst I need 9.5% returns each year, I target 12%+ investments…


03 déc. 2020

Re: the Budget in ER. I am curious to know how you will include some ‘big ticket’ items that may have to be purchased occasionally. I am thinking for eg. A car replacement that may have to be catered for in say 5 years times should ones current car is slightly older. Have you thought about this scenario ? I am keen to understand that as I am trying to build that scenario into my ER plans. I am not FIRED yet but hope to be soon. Appreciate your input to this!

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