In one of our recent YouTube videos (https://youtu.be/Fy2Z3ibNa9w) we mentioned one of our key financial independence practices. We call it "Doing the Numbers". Quite simply, for the last four years we take the time, once a month, to get answers to the following questions:
- How much money did we spend this month?
- How much money did we make this month (total)?
- How much money did we make from our investments (interest, dividends, rent)?
- What is our new financial "net worth"?
We consider this practice to be critically important in personal financial and retirement planning. If you do this regularly over a year or more, you will start to recognize some trends. You will likely see that you spend a lot of money on stuff you don't really care about; expenses that don't make you happier. However, if you are spending less than you earn and investing the difference, then over time you should see that the income from your investments increase every month. This is the fun part! But most importantly, you will learn how much money you spend in a year.
Why is knowing how much money you spend in a year important? Because if you don't know how much money you spend, then you can't know how much money you need to earn from your investments to be able to free yourself from the need to work for money. This is so important that I will say it again. If you don't know how much money you spend, then you can't know how much money you need to earn from your investments to be able to free yourself from the need to work for money.
For example, if you spend $60,000 in a year, then you know you need to have enough investments (or other income sources) to provide you $60,000 of income in a year. For you, perhaps part of this $60,000 is provided by a pension from a previous job, or else from a government benefit of some kind, or from part time work doing something you love.
Even if you love every aspect of your job (congratulations if this is you) there may come a time in your life when you decide you might want to leave your full-time job to work on a personal passion project that doesn't earn you any income. Or you might want the time so that you can travel. Or perhaps to spend more time with family.
Once you have your monthly tracking method set up, it's not as hard or time consuming as you may think to update your numbers monthly. Some questions we hear are:
"Do I have to keep all my receipts and then build a spreadsheet to track everything?" NO! Although that is one way to do it, entering all your transactions manually can be very time consuming, especially considering the high number of transactions most of us have in any given month. Instead, get help. Use a program or application that does the work for you! We use a program called Mint to track most of our spending and income. Mint can be connected to read transaction data from a person's bank accounts, and automatically classifies your transactions and calculates your net work. See the link to Mint in our resources page at OnFIlandtime.com (not sponsored).
"Isn't that really boring?". For us it's not. After inputting or confirming the data each month, we then plot a few numbers on a chart, so it is more visually appealing to us. We posted our chart in a prominent place on a wall, where we would see it multiple times daily as a reminder of what we are shooting for (numerically). The numbers we plot are the expenses, income, and any income from our investment. At some point you will see the line connecting all the monthly dots for your "income from investments" approaching or exceeding your monthly spending amount line. This is exciting and makes you feel confident about your future. It shows in graphical form that you are nearing the ability to have a comfortable retirement, which can be achieved when the "income from investment" line crosses the spending line and stays above it (also known as Financial Independence).
"Can't I just let my bank do this for me?" No, not really. Your bank will typically only track income and expenses in the accounts at their institution, and won't be good at classifying or inputting cash transactions. They may categorize it or maybe not. Also, if you outsource the whole thing in this way, then you will never truly understand your own numbers, you will never get the confidence to retire….and very likely your bank will try to sell you into some products along the way, usually slowing down the achievement of your financial independence. This exercise is as much about becoming aware of your financial picture as it is about having the numbers available.
This was just the briefest of overviews of our practice, and what it means to us. If you're interested in learning more and starting a practice like this yourself, check out a book called "Your Money or Your Life" by Vicki Robin. This is available on Amazon for under $20 and can help guide you in your practice. Again, like everything on this site we get no commission or referral fee from recommending this resource to you. Please know that we only recommend things that we use or have worked for us in the past.
This post would become too long if I started to talk about investment options, and how to turn savings into investments, into income. So, because this is our first financial post, and tracking your own numbers is also a good first step for people just starting on the path to Financial Independence….I think that's enough for today!
What do you think? Are you going to start tracking your numbers? Do you have any resources that you already use to do a practice like this? Leave a comment below, and don't forget to subscribe for updates!