You won’t have to wake up early every day at 7 or 6 AM if you’re tired or you’re willing to sleep longer and it won’t panic you because you would have enough passive income [1].
Thus, here I am again, continuing my journey to say yes to FIRE. Are you ready to start your journey along with me to achieve financial freedom? If yes, then let’s begin with it because I’m tired of being poor. You must be too.
Throughout the episodes ( episode 1) of the financial independence podcast, you will learn how to make your money work for you. Additionally, you will experience an exciting journey about the financial diaries of a millennial on her way to Financial Independence and Retiring Early.
What to do without a big initial investment?
This is the defining problem that what do we do without having a big stash of cash? How do we achieve FIRE and build enough passive income without having a big initial investment? The answer to this problem statement is our way to achieve FIRE [4].
Money Management
Let’s dive deep into the world of finances and management of our own money [5].
Ground Zero:
Ground Zero is the essential and first step to money management. In this, you have to sit down at the end of every month and do your personal finances.
I know it’s annoying and it’s tiring but you’ll eventually realize why it’s important [6]. It’s basically owning your personal finances.
You might think of an App that will do it for you but no! In this case scenario, it’s recommended that you go through your finances because you begin to realize things.
Every time I talk to a non-finance person or someone who hasn’t studied Advanced Math, Finance, Economics, they freak out at the thought of doing personal finances.
I have made it really easy for those of you out there. We’ll start from the very basics which will make it really easy for you [7].
Why it is important to own your personal finances?
I’m asking you to do this painful exercise at the end of each month of filling in an Excel sheet because I have a personal learning experience that I would like to share.
At the beginning of COVID, I was a bit depressed due to the whole situation and not being able to do anything. I was earning a salary as well.
So, I would think what am I going to do this morning? I can go to the cinema or buy alcohol from the supermarket as it’s pretty cheap there as compared to bars [8].
I would start thinking what am I going to do with this money? Then, I ended up deciding that I would treat myself. I love a supermarket named Zara.
So, I decided to buy items from Zara each week. At the end of each week, I got so excited to receive my Zara package.
Then I started doing my finance at the end of the month and it was all Zara’s items. I was shocked and on the verge of crying that I spent so much in Zara.
It was an eye-opener for me. Thank God I was doing the finances due to which I was able to stop spending so much on treating myself kind of activity the next month.
It helped me be a bit more rational and down to Earth. We’re not millionaires here and that is why it is important to own your personal finances.
Does it help you in realizing what you’re spending your money on every month? What is your income? And what are your costs?
Savings
All of this can be managed by the Excel template that I have shared with you. That is the main formula. The interesting thing here is to calculate the savings.
The formula for savings is income minus costs. It is easier to calculate on a monthly basis because most of your costs are paid monthly like the rent or paying for the gym.
We want savings, which means income minus costs to be positive because if that won’t be positive you’ll have to ask your boyfriend to pay your rent which seems pretty shameful.
How to do savings?
The easiest way that I follow is to always pay for stuff through credit or debit card. This way all the transactions made are in digital format from the same place and the same bank account.
Therefore, at the end of the month when I log in to my banking app, I’m able to see all my money movements categorized into days.
They also tell you if your savings are positive, it is credit and when your savings are negative, it is debit.
Therefore, at the end of each month, I sit down with a glass of wine or beer, or cocktail because sometimes it’s needed.
You can also do the same. Provide yourself a good drink, stretch your arms and fingers because you’re going to type.
Super Magical Excel Sheet
I have prepared an excel template especially for you that will make the whole management process easier for you.
You can download the Excel templates and use them for yourself. You can also email or WhatsApp me and I’ll send it to you absolutely free.
In the Excel sheet that I have made, we have two parts. Let’s start with the right side which is basically a table.
This way we’ll make a list and divide it Into columns. Each column is a category. For example, I’ve made a table of five columns. That means I’m going to have five categories and a couple of rows.
In this table, we are going to list all the barriers, variable costs. It includes the costs that change every month or that can change.
Why categories?
I find that pretty useful because then I have my variable costs which are the ones that I have the most influence in and I have linked it all in a way that makes sense.
For example, my first category is food. I realize I spent a lot on food but that is okay because food is a basic necessity. Thus, I can group everything that has to do with food into one.
Another category that I have is leisure. It includes all those activities that give me pleasure, more consumption.
All those activities that I enjoy doing and it doesn’t have to be productive or do not contribute to one of my basic needs.
Then I have another category called education where I list books that I buy or the courses that I do.
Another good category to mention would be random. I think it is a very useful one to have because it includes occasional things I spent money on that don’t happen every day.
Like, buying an ice cream someday or buying a gadget for my phone. You can also add a category of health.
Finally, I have a category of transport which includes the cost of fuel when I tank my car, when I pay for the train, etc.
To summarize variable cost, it is the cost that changes over time.
So what you have to do at the end of the month is that you have to make a table or use the one in the Excel sheet that I provided.
Go through your online banking app and check your transactions. List it in the variable cost section, divide it into categories, and Excel will make it easier for you.
Once you are done with this table, go to the other table on the left side. In this table, you’ll see different mini tables that define different things financially. Let me explain this to you.
Income
The first mini table represents income which includes the inflow of money that comes to your bank account every month which we all love and fight for. You can have different sources of income.
You might already have passive income from stocks which you can list here. For example, I have a passive income of five euros of stocks which is ridiculous but we’ll discuss it in the next blog.
That’s the passive income I have. Of course, I have an active income as well which is my salary. You just have to insert numbers there and the Excel calculates the total itself.
Fixed Costs
Then the second mini table is of fixed costs which is the one I haven’t discussed up till now. The fixed costs are the ones that do not change every month.
It includes the rent, the utilities, the phone bill, insurance bill, your car taxes, gym subscription, magazine subscription, Netflix, Spotify, and all other monthly subscriptions.
So, it basically includes a contract that you have signed and that comes every month. It is called direct debit because they take money directly from your account.
You can just leave fixed costs like that until you change your rent, unsubscribe from the gym, etc.
Variable Costs
After fixed cost, you have a mini table for variable costs that states the categories. Then there’s a sum of all transactions in the category.
Total cost
Then, the sum of fixed costs and variable costs gives you the total costs.
Overview
The last mini table on the Excel sheet is of overview. It has 4 different buckets or cells.
The total income, the total cost, the savings, and the percentage of these savings corresponding to your total income [9].
Total income is just as in the first mini table. The total cost is what we calculate the total of fixed cost plus variable cost. Then the savings is through this formula:
%Savings = Income – Total Cost
We usually pray for the savings to be positive. Then you calculate the percentage through the following formula:
%Savings = Savings / Income
It represents how much of the total income you have saved and it is very important to achieve FIRE. We hope for this number to be as big as possible.
Recommended Saving Percentage
Let’s talk about percentages. In the book rich that poor that and the Millionaire minds, it is recommended to save between 15% and 30%.
It’s totally understandable if you’re young and you don’t have a high salary. You can do savings of 10% or 5%.
You might want to buy things from what you earn rather than saving most of them. In Spanish, the reward is called Capri choice.
You’re going to have so many of those impulses, then maybe you can make a saving of 40% or 50%. Savings of 50% is really impressive. Whoever is doing 50% deserves applause.
You can set up a range of 10% to 30% and aim to save between 15%, 10%, or 30% each month because you also need to enjoy life and not just save each penny you earn.
Life is too short and we never know when it gonna end so do future planning but never forget to enjoy the present life.
For example, I like massages. So, every once in a while I pay for a massage. That definitely reduces my savings but it also increases my peace of mind and makes me happy.
What we have learned?
In this blog, we have learned to own our personal finances. We have learned and understood that owning our personal finance is essential to achieve FIRE.
It’s the first step towards achieving the financial freedom that we want. Owning your personal finance makes you aware of what you spend your money on.
In the Next Blog
In this blog, we discussed the very first step towards doing something with your savings. This has made us understand that why it is important to save money.
In the next blog, I’ll discuss a very easy way of doing something amazing with these savings because right now if I’ll ask you what you’re doing with these savings?
Your answer would probably be that they are in the bank and they are safe there. They are safe in the bank but do you know the bank is taking advantage of them.
You can leave a part of your money in the bank because that is going to be your safety net but do something with the rest of the money. It is so because if you leave it in the bank, you are working and your money is chilling.
What we’re trying to achieve is that our money works and we be the ones chilling. Let’s see in the coming blogs how we can chill and how our money can work for us.
Key to Success
Passive income is the key to success! It is the key to earning money that is directly compensated by time.
You’re not dependent on your monthly salary. It’s just like a company is paying you for the job you performed during the weekdays, but passively.
One way we can achieve this is by receiving dividends from stock companies that give a certain percentage on an annual basis or quarterly basis. Another way includes renting your real estate [2].
We also discussed a point that leaves everyone clueless and that is all these require a big initial investment or as I love to say, a big stash of cash.
You’ll be going through this term more as you’ll come across my blogs. A big stash of cash is what I don’t have and probably you also do not have that that’s why you’re reading this blog [3].
