When you start on your financial independence journey, the first thing you must do is cut expenses.
But you won’t know what to cut until you figure out how much you currently spend. After logging every monthly expense, many are shocked by the results. “$700 a month eating out?! No wonder I’m in debt!”
After logging all of your expenses you must be ruthless in determining what is absolutely essential and what should be cut.
In the personal finance world, there are arguments on what categories are most important to cut. Many, including myself, like to focus on the big three: housing, transportation, and food. Others like to focus on small items that add up, this is commonly referred to as the Latte Factor. Both have value but I’ll make the argument on initially cutting the big three. Members of the Millennial and Gen-Z generations may also have a fourth major expense: student loans.
If you live at home after graduation or split an RV like Jacob Lund Fisker, you can get your spending down to between $500-1,000 per month. These are not realistic numbers for 99% of people, but certainly possible. I work with some younger millennials who live at home and have a fun life on $1,000-2,000 per month. They don’t pay for housing and their food expenses are negligible since their parents do a majority of the grocery shopping. They may even drive a family vehicle.
A couple in a low cost of living area could get by semi-comfortably on about $1,500-2,000 as well. In 2013, my wife and I spent in this range. This was our first year living in the USA together. This was accomplished by cutting the big three expenses to the bare-bones. We had a good deal on a small living space, shared a 25-year-old $1,500 car, and cooked almost every meal. It’s certainly possible, but it’s not fun long term.
Frugality only gets you so far, you need to make more money. In the end, there is a limit to how frugal you can be. Living in your childhood room for your first few working years is a great idea and a huge advantage, especially in a high cost of living area. But it can’t be your long-term plan.
After you downgrade your housing, vehicle, and start cooking most of your meals, it should be ok to go out for coffee or brunch every now and then as your major expenses are always kept extremely low. This has worked very well for us and eliminated a lot of day-to-day budgeting stress.
To clarify: assuming you pay rent, the lowest your expenses can be is about $1,500 a month. Now that your expenses are ruthlessly cut, the next step requires the ruthless pursuit of increasing your income. Most private and public companies allow you to increase your salary through hard work and productivity. Basically, make yourself extremely valuable to the company and then, when the time is right, negotiate for a large raise or find a better job. Note: that this doesn’t work if you’re employed by the government as seniority is much more valuable than hard work and innovation. But the pensions are nice.
What if you cut your expenses to $1,500 a month but you only make $2,000 a month? Well, you won’t go into debt but you aren’t getting that far ahead either. In fact, it would take over 26 years to hit financial independence!
However, if you spend $1,500 a month but make $5,000 a month you can save a large amount and be financially independent in as little as eight years!
The personal finance community has done a great job showing others how to save their way to financial independence while doing little to push for career development and salary increases. Our personal monthly spending has gone from $1,500 per month in 2013 to $3,000 per month in 2017. This seems like quite the jump until you consider our 2017 income is almost quadruple our 2013 income. Cutting our expenses back down to $1,500 a month wouldn’t significantly decrease our time to financial independence so I see no reason to go back to that bare-bones lifestyle. I’d rather focus on making more money without counting every penny.
Let’s be honest here, it’s really hard to reach financial independence on $40,000 a year. But it’s really easy to reach financial independence on $400,000 a year. If you can figure out how to make the $400,000 then you will speed up your journey significantly. And if you never make it close to that high, as I probably won’t; it’s not the worst thing in the world to finish your ten-year career at the $150,000 per year mark with a seven-figure nest egg.