If you’ve made the decision to sort your finances out and begin on the FIRE path, you’ll have realised that in order to make some progress you need to find a way to feed the investing beast.
It’s easy to do a little. Most of us can, in a fit of enthusiasm, set up a direct debit for £100 a month without too much trouble. We can also look at optimising our work pension by switching funds or possibly providers. Then we hit a wall - we’ve made a start but it’s going to be tough to scale things up to a decent speed.
The problem is that most of us quite simply live to our means. We enjoy a lifestyle to match our income, and habits like that are hard to break. We reach this point by sleepwalking from a frugal kid who is used to having little money, up the career ladder with increasing earning power, and never really stop to think about spending priorities. Life gets in the way, with expensive things like cars and houses to pay for, and we’re often pushing ourselves so hard that we spend the remaining money on treats and conveniences. Spending habits develop.
There are two ways to look at cutting your spending. You can be unhappy and look upon it as giving stuff up. Or you can adopt the Mr Money Mustache viewpoint and embrace the frugality, find the positive in a simpler life where you don’t derive your pleasure from spending money.
There is in fact a sound basis for this viewpoint. Research shows that each additional pound you spend on those treats and conveniences tends to bring you less happiness than the pound before. So this may not be so bad after all - we’re only going to be cutting the last spending, the bit which adds the least happiness!
Do a little audit of your spending, to see where your money actually goes. I’ve tried to brainstorm a list of possible spends and put them into categories, but I’ve undoubtedly missed some:
Home
- Mortgage or rent
- Utilities
- Insurances
- Cleaners / Gardeners / Window cleaners / Services
- Repairs / Redecoration
- Furnishings / Carpets / Beds
Transport
- Bus / train fares
- Car loan
- Car insurance, MOT, servicing, repairs, fuel
- Parking fees
- Car washes
Family
- Childcare
- Gifts
- Pocket money
- Schools fees
- After school clubs
- School trips
Food & Drink
- Groceries
- Eating out
- Takeaway food
- Drinks out
- Subscriptions
Other Shopping
- Clothes / Footwear
- Glasses / Contact lenses /
- Makeup / jewellery
Entertainment
- TV Licence
- Streaming subscriptions
- Gaming subscriptions
- Magazines & newspapers
- Mobile phone / other gadgets
- Computer / laptop
- Cinema
- Days out
Holidays
- Weekends away / short breaks
- UK holidays
- Foreign holidays
Hobbies
- Gambling
Medical
- Dentist
- Optician
- Private healthcare
- Osteopath / Chiropractor / Therapies
Debt repayments and interest
Other
Try to list all your spending and put each item under the nearest suitable heading. Use this to get a sense of where your money is going, which categories take up the most money. Then think about which you could cut without too much pain. If you’re considering making more severe cuts, try to balance this is looking at the payoff - you could read my article on the 10 year return of a bacon butty for this.
Obviously the aim of the exercise is to see what money you could free up for your investing goal.
If the resulting sum is low, don’t be disheartened. Not all spending commitments last forever. The pain of your mortgage payment will reduce over the years as inflation has an impact - your wages should go up with inflation, while the amount of your outstanding loan diminishes in real terms. Kids leave home and eventually start paying their own way. These changes will leave you more money to invest later on.
Identifying savings in each category can be hard. Reducing the fuel cost of your commute is definitely a longer term goal; most of us would find it hard to relocate to a job closer to home instantly.
The great news is that by making this effort, you get rewarded twice! As well as investing more, your new frugal ways have reduced your spending. This means that your target has been reduced by 25 times the savings. Your smaller goal will be a lot quicker to reach.
Measure your Savings Rate before and after this process, to impress yourself with the impact you’ve made. Your Savings Rate is just the percentage of your take home pay that you are saving. If you were at 10%, aim for 20%. If you were at 40%, aim for 50%. Any improvement is useful. And for added motivation, look at fireplanner to see how the change will speed up your progress to FI.
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