Budget For Financial Independence

Budgeting is a must. You need to budget for financial independence. A budget basically helps you to see clearly how much you are making, how much you are spending, and how much you are saving. Without tracking your financials, it is almost impossible to make progress towards financial independence.

I just finished putting together my budget for financial independence. It took like 2 weeks just to find the right template and get all the data from different financial institutions. I think it took longer because I wanted to see my actuals from last year and getting the historical data for the whole of 2023 (bank statements, credit card details, IRA details, etc.) was not very easy.

I live in Korea and I am not sure how it is in other countries but, due to IT security, getting financial data out from a bank was a real pain in the ass. There are fintech players in Korea that does similar things like Empower (we have Toss and Never) but if I want to get the data out into a google sheet, I would have the same challenge. Anyway, once I had all the data, things started to fall in place and I was able to see my spending, saving, and income in a nice dashboard format.

Having just gone through this experience, let me share my thoughts and some tips on creating a simple budget for Financial Independence.

How To Create a Simple Budget For Financial Independence

For me, the key word is “simple”. Unless it’s simple, I won’t do it. So, below is what I did to keep things simple. To me, simple = easy and cheap. If you happen to have an easier method, please leave a comment below and share.

1. Find a budgeting tool. There are many options. You can go low budget with something like a google spreadsheet option, or you can go fancy with paid apps. You need to do some research and find a tool that works for you. To save you some time, here is a post on some of the more popular budgeting tools. I personally use Google sheets. It’s simple. It’s cheap. It gives me total control. I don’t want some app to own my data. I want to own my data and be able to know exactly where each entry is going and its impacts on my financials. Yes, I am obsessive. Maybe it’s due to my 30 years of being in finance. If you want to see the Google sheet that I am using, click here.
2. List your income. If you have multiple income streams, that’s great! List them all out. For me, at the point of this writing, it’s basically the salary from my corporate job, some interest income from my CDs and savings account, and random income from selling used keyboards (i.e., sales from eBay). Once you have this info, enter them into your tool.
3. Get your historical financial transaction data. I needed to get data from my bank, credit card companies, and IRA/brokerage institutions. This is the part that took me the longest time. I wanted to get the entire 2023 to be able to assess my spending habits for the whole year. You may just want to do it for like 3 months or you might want to do it for 3 years. Up to you but, the longer you go back the longer it will take to get all the data. Once you get your financial transaction data, categorize and enter them to your tool.
4. Figure out your net worth. This is not directly related to doing your budget but, if you are doing this to achieve your financial independence, then you need to know your net worth so, you might as well just do it while you have the financial data ready. If you want some background on how to calculate net worth, here is a short article from Investopedia. Often, this is where you come face to face with reality. You get to see, in cold numbers, your total net worth. Brace yourself for possible surprises. Some people will have good surprises, some will have bad. But, don’t dwell too much on it. What’s important is you accept the reality and you start make changes to achieve your goals.
5. Create your budget. With your income, expenses, and financial goals in mind, it’s time to create your budget. Start by allocating a portion of your income to cover your fixed expenses. Then, designate specific amounts for your variable expenses and savings goals. Here is where you can review your past expenses and decided how you can cut back on some of your spendings. For example, I saw that I was spending way too much on eating out. So, I decided to put down a more modest number next to eating out. But, at the same time, be realistic with your budgeting – it’s important to allow yourself some flexibility for unexpected expenses or leisure activities.
6. Monitor and adjust. Once your budget is in place, it’s essential to monitor your spending regularly. Keep track of your expenses and compare them to the amounts you allocated in your budget. This will help you identify any areas where you might be overspending and allow you to make adjustments as needed. At minimum, you want to look at this once a week. I don’t recommend doing this just once a month because, by the end of month, you will likely have forgotten what you did 4 weeks ago and it will take you that much longer to get the details in place. Just put a reminder to do it at least once a week.
7. Embrace frugality. As you work towards financial independence, embracing a frugal mindset and practicing smart spending habits can significantly impact your budget. Look for ways to cut costs, such as cooking at home, using public transportation, or seeking out free or low-cost entertainment options. Every dollar saved is a step closer to your financial independence.

Things I learned From Tracking My Budget

Some of these might be obvious to you but, this is what I came away from doing budgeting.

1. My savings rate was much lower than I hoped – My savings rate for 2023 came out to be 17%. I initially made some categorization mistakes and thought that my savings rate was like 40%. I was like “yeah! I’m on FIRE!” But then after making fixes to my categories, it came down to 17% and totally got me bummed. Ok, so 17% savings is better than 0%. But I have some work to do.
2. I became more aware of those lazy money just sitting idle in the checking account – my checking account pays nothing. If I want my money to work, I need to move them to either fixed term deposits or some higher interest savings account. I was able to identify sums of cash just sitting around not doing anything. I should manage this more tightly to ensure I maximize my interest earnings.
3. I started to see big gaps in my expenses where I can save money – snacks, lunches, eating out, subscriptions I don’t really need, etc. These were not big expenses but, over the course of the year, they add up. I needed to make sure I change my spending habits to ensure I don’t have these small holes.
4. I was able to see trends and was able to better forecast my income and expenses – this was important to make better decision on my earlier #1 issue: lazy, idle cash. One of the reasons why I didn’t do anything about lazy money was because I didn’t know if I would need cash urgently and I just didn’t want to go into a negative balance. But, having a more accurate forecast, I can then put more money to work and have it ready just when I need it.
5. I was able to visualize my passive income growing in the future – This pertains to the mindset side of things – but, sometimes, working on your side hustle, there would be months where you are putting in the hours but, not seeing any results. This can really get you burned out and jaded. But, while doing my budget, I began to add numbers (wishful numbers e.g., by March, I will make additional thousand dollars) next to my side hustle items. It may be nothing but, it certainly served to motivate me and to give me a visual. If you haven’t done it before, I encourage you to try it. It gives you a boost to work towards a goal, a more concrete, numeric goal.

Tips on budgeting for financial independence

Here are couple of tips to keep in mind as you build out your budget system.

1. Use a budgeting tool – when you start out new, you don’t know where to start. Budget is not a very complex thing but, doing it for the first time, it could be a daunting task. Suggest you find some sort of a budgeting tool to start. To get you started on your search, here is a post on top 5 budgeting tools. For me, I didn’t want to use any apps because most of the apps charge you fees. Also, I had less control when I used an app. So, I went with the Google sheet option. Here is the template that I used to get started – Spreadsheet Mastery. It is a no BS template that is minimal and easy to use. I used Google sheet version but there is also an Excel version.
2. Credit card usage date vs. credit card payment date – Your credit card transaction date will happen earlier than the date when you credit card will actually be paid out of your checking account (credit card payment usually lags by 1 to 2 weeks). Because of this delay, there will be some gaps when you try to reconcile statements from all of your financial institutions (specifically, your checking account vs. your credit card statement). So, here is what I did. I entered the credit card deduction from my checking account as a negative withdrawal but, on the credit card side, added the amounts from the credit card statement against the negative withdrawal. This way, you are reconciling your credit card details against the lump sum withdrawal on your checking account. If anyone else has a better way of reconciling credit cards, please leave a comment down below. I would love to learn.
3. Don’t get too caught up with the technicals – This was my mistake, I am a bit OCD and I can spend a lot of energy perfecting things. But, tip is to try and move on even if it is not perfect. Look at the big picture and see that budget is a means to an end. End being achieving frugal living and ultimately building a sound financial health to become financially independent. That’s it.
4. Do take action when you see the opportunity – The whole purpose is to help you make the right decision when it comes to earning, spending and saving. It does no good to only do the analysis and not take any action. For example, after seeing that I was leaving cash idle, I took the action to find a way to make every dollar work, every day. Well, almost every day. I opened another account where they pay you interest even on a checking account and moved my idle cash to that account. Another thing I did was I stopped going out to eat all the time. My eating out habit was more emotional than physical. I liked the ambiance, I liked the convenience, etc. But, I didn’t physically need to eat out. Eating in helps to reduce expenses tremendously.

In Conclusion

Creating a simple budget is a crucial first step towards financial independence. By understanding your income, tracking your expenses, setting clear financial goals, and making informed spending decisions, you can take control of your finances and work towards a future of freedom and security.

He who fails to plan, plans to fail.

Winston Churchill

Remember, achieving financial independence is a journey that requires commitment and discipline. While creating a budget is an essential tool, it’s just one part of the larger picture. Stay focused, stay determined, and keep making strides towards your financial goals. Your future self will thank you for the effort and diligence you put in today.