How to Retire Early: Track your expenses, calculate your savings rate, and cut back spending
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Spend on what you love and forget about the rest! Today we’re talking all about tracking your spending and understanding how you spend your money.
If you haven't seen my post on what to do to start your journey to FIRE and really solidify what your dream retirement life looks, be sure to go check out my last post before diving into the numbers. Once you do that let's talk.
Track your spending
I started my journey to FIRE in December of 2019 after I read Mr. Money Mustache's blog. Prior to that I had no idea what my money was doing, how much I was making, and how much I was spending every single month. If you have an app like Mint or YNAB (You Need a Budget), then you probably already know the ballpark of what you make and what you spend every month. That is great, you can skip ahead and calculate your savings rate.
However if you're like me and you had no idea where to start I have a free downloadable template for you to start tracking your money and it's really, really simple. I bucket my money into income, savings, and expenses so you know what is coming in and what is going out. It’s important to track your spending for ~3 months to get an accurate look into how much money you're spending per month.
This will give you a more accurate number when calculating your savings rate. So if you don't know where to start, go make a copy of my free spreadsheet that I still use to this day to use to track my money. I don't look at it too frequently, I try and only go in to capture all of my expenses once a week. I’ll go back into my credit cards and look at all my different statements and capture what I did so I'm not obsessively checking my spreadsheet.
Once the FIRE is lit underneath you it's really easy to get lost in the spreadsheets and become so absorbed with them. I will be honest, that was me in early 2020. I was obsessed. It's taken a while to stop that habit and is still work in progress to becoming more chill about it. I get it, it’s so exciting once you find FIRE, but I really try to only open my spreadsheet once a week and do a weekly money date with yourself.
Calculate your savings rate
Once you have your system of tracking your money set up, you can calculate your savings rate. Savings rate is your income minus your expenses divided by your income, i.e. your savings divided by your income.
Say for example my income is $7,000 and I am spending $2,000 between rent, utilities, all of my bills, and shopping. So that would be $7,000 - $2,000 = $5,000. So $5,000 of savings divided by $7,000 = 0.71. Then multiply that times 100 to turn that into a percent. So you would be at a 71% savings rate.
Then using this graph by Mr. Money Mustache, you will be able to estimate when you are able to retire. Based on the simple math above with a 70% savings rate, I would be able to retire in approximately 8.5 years, which is amazing!
The math is as Mr. Money Mustache says, “shockingly simple,” and I agree it is shockingly simple, but there are a bit more nuances and things that are subject to change. I will get into that later. It's just exciting to know about how long it may take you to retire early.
Cut back spending
Now that you know your average savings rate, it’s time to evaluate spending. I go through an exercise of value-based spending. Since you’ve tracked your money for at least 3 months, you’re now able to see categories that are really high in spending and where you can cut back on.
It is important to go through a value-based spending exercise to see where you can cut back and this is the exciting part to see where you can save even more money to ultimately lower your costs and expenses for good and reach early retirement even faster.
As an example, I love coffee. I love a good latte. I'm really on a Starbucks honey oat milk latte kick right now. However I really do not get coffee just to get coffee. I have my Oatly oat milk at home and I have my Trader Joe's instant cold brew powder that I really love. Honestly, for an everyday thing, it makes a delicious drink. I never mindlessly go get a fancy overpriced latte.
For me it's when my friends want to meet up and grab a drink, then I will of course go get coffee with them. I'm sharing time with them and it's less about the latte, it's more about the experience of being with another person. Or if I'm going on a long walk by myself, my Starbucks is half a mile away, then I can go sit in the park and journal. That is a very intentional act of going to go get a Starbucks latte.
Although I do also have my video on how to stop shopping which was really helpful for me to actually before I even began my FIRE journey reevaluate all of my spending but I'm not saying you have to scrimp. You don't have to live like you're back in college eating Top Ramen, I mean unless you enjoy that, which TBH I do. When I say to evaluate your spending, I really don't mean to cut back on everything.
Spend on what you love.
You can take yourself out to sushi to celebrate your wins, if that all aligns with your core values. I'm all about celebrating wins and not depriving myself of that. Life is meant to be lived. It is a whole journey and you want to look back at your life and have enjoyed that time. Becoming financially independent won’t suddenly change your happiness. You need to learn to be happy and find happiness on the journey.
Figuring out what you love spending on will ultimately help you increase your savings rate and even retire early. If you cut out the things that you don't love and spend on things you do, it will bring down the price you need to become financially independent.
Start tracking your monthly spending, if you’re not already, and figure out your expenses. Keep track of all of your money—know where it’s going and what it's doing. Then calculate your savings rate. Get excited about finding out when you can retire early!
If you’re also on your journey to financial freedom, go figure out your average savings rate and leave it in the comments below! And keep spreading the FIRE so we get other people turned onto the idea of early retirement.
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Let's retire early together!
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