Irish Financial Independence & Personal Finance Podcast

How to start off on the financial independence journey?

Sunday 21st October 2018

It might sound like a crazy idea to think that you could stop working for money (e.g having a job) in a few years. But the truth is, it isn't as hard as you might think! Being financially independent is all about controlling your monthly cash flow – how much passive income you have coming in verses the expenses you have going out.

Managing my monthly cash flow is why I invest in assets that generate monthly income. This income quickly replaces my earned income (from wages) and is what ultimately allows one to stop working for money.

I'm going to outline what I think is the first step in starting a financial freedom journey. It isn't about earning more money, but instead taking control of the money your currently earning.

Get control of your expenses

Before you even start thinking about financial independence, you need to figure out how much income you need each month to support your lifestyle. If you’re buried in consumer debt, then the first thing you will need to do, is clear that debt.

For me, the best thing money can buy is my own freedom. For example, a bigger house and newer car, while nice to have, is something that will wait until after I'm financially independent. Having a larger mortgage or car loan simply moves me further away from achieving my goal.

Ultimately, if you want to achieve financial independence the biggest question you will need to ask yourself is: can I make the sacrifice now? Expensive holidays, flashy clothes and new furniture just may need to wait a few years - but trust me, it will be worth the wait.

In fact, this sacrifice really is the biggest barrier that’s stopping most people from achieving financial independence. It isn't difficult if you change the way you manage your money, but for so many, changing their spending habits simply isn't something they are willing to change.

Provided you’re willing to make the change, here is what you need to do.

1. Start tracking your monthly spending

Divide your expenses into three main categories:

a. Basic living cost related expenses - these are expenses such as your mortgage, bills, health related costs, transportation costs.

b. Your lifestyle related costs - such as entertainment, seasonal costs (Christmas, birthdays etc), dining out expenses, takeaway expenses, household purchases and any personal costs that support your lifestyle.

c. Unnecessary costs - anything that comes up that you feel could have been avoided. These are those bad purchases that add up in the long run that you feel with a new drive towards financial independence that you could avoid. Interest on debts that could be avoided (e.g. credit card debt) should be listed here as well.

The idea of this exercise is to itemise any costs that you could avoid that could be preventing you from reaching financial independence. Work out the following:

  • How much your basic living costs are per month.
  • How much you need to support your lifestyle. A good example is, you may play a sport or have certain hobbies - this is part of who you are, so you don't want to give that up.

Once you have the numbers, see if you can turn this into some sort of budget for next month and start tracking your performance each and every month. I find myself a lot more comfortable about spending money when I know my budget - it feels great being in control of my expenses.

2. Start paying yourself first

You have likely heard of this saying before, but often there is confusion over what this actually means. Paying yourself first doesn't mean paying your bills or mortgage before anything else. It actually means your first transaction after a pay day should be into your savings or investments. After all, if you pay your mortgage first, you’re not actually paying yourself first - you're paying the bank first!

To be financially independent, you’re going to have to learn how to be an investor - there is no getting around it. These days, the return on savings accounts are less than the inflation rate, so becoming an investor is the only way to make your money start working for you.

In future articles I will cover in more detail what I invest in, but for now, ask yourself the following question - can your lifestyle be adjusted so that you could start putting aside €1,000 - €2,000 per month?

As I said above, becoming financially independent is all about prioritising. Can you adjust your lifestyle to make financial freedom your number one priority?

As a follow up to this article, take a look at this article from Robert Kiyosaki, author of Rich Dad, Poor Dad on the power of paying yourself first.

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