Based on the post i made on financial independence, i will be doing elaborate posts on all the 8 steps in my financial independence post. The first step to financial independence is tracking all of your expenses. The reason you track all of your expenses is to find unnecessary expenses. Common examples are unused fitness memberships, unnecessary snacking, etc. Furthermore, depending on your frugality, you might find subscriptions which can be substituted with free alternatives. A good example is Spotify. YouTube can provide the same music as Spotify. However, YouTube is free.
Step 1 to Financial Independence: Track All Expenses
The first step to financial independence is tracking all of your expenses. This means ALL. Whether it may be energy drinks, Starbucks, Avocado toast, nail clippers etc. It is important that everything which costs you money is included in this part of your tracking.
Go Through Your Bank Statement
First, you will have to go through your bank statement. Do it on a month-to-month basis. First of all, you should go back a month or two and start mapping your expenses. The reason you want to go back a month or two is to create an overview of what costs are becoming duplicates from month to month. The revisiting of your previous bank statements, are therefore to find financially unhealthy habits. These habits should then be eliminated or accepted, based on how much you want to save.
If you have no option but to save, this tool will help you greatly.
An example could be, that you might find a pattern in snacks. Personally, i was shocked at how much i spend on energy drinks. Therefore, i have tried to change my habit on purchasing energy drinks. However, i have taken the chose not to exclude energy drinks completely, while i want to cut the costs significantly.
Create The Actual Overview
Now that you have looked at your bank statement, you should start to put all the expenses in an excel or google docs sheet. The main topic in this section is to find the categories in your expenses.
The sheet you are creating should be built like you normally would built a budget. However, instead of assigning X among of EUR to each post/category, you need to combine the expenses into the same categories. For example, i personally use these categories:
- Housing: rent, electricity, water, etc.
- Food: Monthly grocery shopping.
- Food savings account: Savings account for bulk purchases e.g. meat.
- Phone bills: Utility bill, repayment on phones.
- Entertainment: Netflix, holidays etc.
- Gift: Birthday gifts, wedding gifts, Christmas gifts, etc.
- Website: Advertising expenses, hosting, etc.
- Replace/repair: repairing and replacement costs of different things (e.g. new computer, bicycle parts, etc.).
- Personal shopping: Energy drinks, clothing, fast-food, etc.
- Transport: Gasoline, bus fare, etc.
- Pets: Pet related expenses including insurance.
- Household: Garbage bags, cleaning articles etc.
- Investments: Not an expense, but it is money leaving your account, and you need to track it ALL.
- Unknown: A category for payments which has no direct relation to anything.
These categories might not be what you need, and therefore you need to do your own work as well. Furthermore, you might disagree with the way i have grouped some of my categories. E.g. many would divide my housing post into multiple posts. However, my girlfriend and i pay the landlord the same amount every month, and through 4 years of living here, we have had no rent raises. Hence, the housing expenses are stable, and therefore i have grouped the different expenses into one.
How To Setup The Sheet
Now that you have worked out the categories. It is time to make the first step to financial independence practical – tracking expenses. In my personal sheet i have three tabs. One for putting in all the expenses, one to combine all of the expenses to their respective categories, and the last to collect the month-to-month expenses compared to my income (my savings rate).
Step 1: Expense Sheet
Create the expense sheet. This sheet is going to be bloated with all of your expenses. This sheet should not be pretty, it is meant to be messy. Throughout the month you will fill in any money leaving your account.
I build the sheet to have the category, a description of the expense, my local currency and a calculation of the EUR currency. The description helps me to identify what i have used my money on.
The sheet can easily be over hundred rows deep. This does not matter, we will make it look pretty in the next step.
Step 2: Overview of the Month, Sheet
In the overview, you will list all of your categories in a nice array. Then by using a “sumif” equation, you are going to sum the entire column from step 1, with the name of the category. Firstly, this will sum all of your expenses to the individual category. Secondly, it gives and overview how the categories “perform”.
This tool allow you to go back into the expense sheet from step 1, if you have a summed category which seems to high or are curious as to how you have used your money.
In the monthly overview sheet i have gathered my income and expenses. The expenses here are found by using the sumif function in Excel. I sum the columns from step 1, with the category names in monthly overview expense sheet. The ten times you did some personal shopping is now aggregated to an overview.
Step 3: The Monthly Savings Rate
In reality you could stop here. However, i need a graphic overview of the month-to-month performance, and so should you!
The final sheet is the monthly savings rate. This is based on the difference between you income and expenses. Which is why i have included my income in the seconds sheet. This will allow you to get a visual overview of your savings rate, or if you are spending more than you earn.
The income and expenses are collected on a month-to-month basis and therefore i can calculate the savings rate from month to month.
Again if you are going to replicate this sheet, beware that first column income and first column expenses are in my local currency. However, you can make to totally different setup than the one i have made.
The first step to financial independence is rather simple, and does not required any hard work. The first thing to do is going through the bank statement. This is just a general step which quickly help you identify if you have any financial unhealthy habits.
Secondly, you have to create the overview, meaning assigning categories for your expenses. These can be setup any way you like as long as all monetary-leaving categories are accounted for.
Thirdly, is to create the actual Excel sheet. It is literally setting up the Excel sheet the first time, and then it is more or less automated (you still have to fill in your expenses, but calculations is automated). The tracking of expenses requires you to sit down for about 15 minutes in order to have the Excel sheet fully setup.
You are now well on your way to financial independence, by tracking you expenses.
This was an elaborate post for the first out of eight financial independence steps. You can read the full post on financial independence here.