All of us would like to be in a good financial position to be able to retire or work less. It is all very well wanting this but to achieve it we actually have to do something. What are the first steps to financial freedom, where to start, there are so many options. I had read books, invested money, started side hustles, had an investment property but was still nowhere.
After many years I had my financial freedom realisations. I was spending too much and all my money. I had learned the hard way about spending more than I should have. There were two objectives, first pay off the debt and second invest the money. But where was I going to find this money?
Where is my money going?
The very first thing I did when I realised that financial freedom was possible was to interrogate my expences. You need to understand in detail what you are spending. If you don’t know what you are spending your money on then you have no control over it. You can only manage it effectively once you know exactly where all your money is going.
Money is like water, if it slips through your hands it disappears. You need to build a dam and collect it for when the rain stops or the drought comes.
It is not easy to understand if your expense profile is normal or not. It would be nice to compare it to something so that you can get an idea if you are over spending or under spending. The best information that I could find was the Living Conditions of Households in South Africa study by Stats SA. This is useful to start with and to compare to your own.
Your profile is unique but there will be similarities with these stats. We are a family of three and have one of our parents living with us too. So effectively we are a household of 4. Compare your own expences you will know what your needs are and where there is opportunity.
My goal was to be better than most of the categories on this study. More importantly though I wanted to see a decrease in my own numbers over time. You will notice that in these categories there is no number for investment or saving.
The personal savings rate for average South Africans is currently -0,2%. That means that the average person is not saving at all (that used to be me). Of all the money that South Africans earned in 2019, 72.8% went to paying debt. So the goal is clear, reduce spending to pay off debt and increase savings and investment.
My First Steps to Financial Freedom
My objective was to understand what I was spending on and then look for opportunities to save. The biggest saving opportunities lie in the biggest spend categories and the ones that recur every month. You can do this by keeping all your receipts or adding up all the info on your credit card statements. Then you can create a spreadsheet to keep track and budget eventually. But that’s the hard way, there is an easier route.
I use a financial aggregator website like 22seven. It is able to add together all your accounts and cards and give you one consolidated view. It automatically categorises and organises your expenses. The interface itself is very easy to use and allows you to easily see how your spending compares to budget or your monthly average. I use this on a daily and monthly basis to track my spending.
For more advanced analysis I use the export feature to CSV to create and excel file. I have been doing this every year since 2015. This analysis is used to track my progress and identify where I need to focus to save.
The graph above compares my expenditure profile for 2015 vs 2019. In my expences comparison I added an investment category to track this as well. When I started this analysis in 2015 the bulk of our spend was on housing, other services, transport and food. You will notice that this is very similar to the national average.
Take control of your Expences
Comparing 2019 to 2015, the biggest spending portion is still on housing and other services but transport has dropped below food. All the biggest categories have decreased vs 2015. Some of the smaller ones have increased so clearly some focus needs to go there now.
Most notably though you will see how the investment line has shot up. This shows that the savings I made have gone into investments. My ongoing goal is to decrease all the other categories and increase the investment category. Let me breakdown each category to explain exactly what I did.
There is not much change in housing, that is because I have been focused on paying off my bond. This was completed in 2019. So in 2020 we should see a significant drop in housing spend as the debt is settles and I invest that money.
I also converted my home to solar as my electricity bill was very high. I used to spend R3000pm on electricity, half of that was a fixed portion. Now with the solar installed it costs around R3000 for a whole year. Look out for a detailed post on this in the future.
Cars, fuel and maintenance make up the category. The biggest cost here was fuel and maintenance. We live outside of town on a plot so our travel distance is probably higher than it should be. The changes we made were for me to find a job closer to home so my travel cost decreased significantly. I am also close enough now so that I can cycle to work a couple of times a week saving even more. We also planned our trips better to avoid unnecessary travel.
This is a mine field of lots of wasted spend including the usual suspects of gym and DSTV. My wife canceled her gym contract as she hardly used it and we downgraded the DSTV package to compact. Insurance we reviewed, got new quotes and I increased my excess portion. I rather use an emergency fund to cover excess.
I increased my DIY work as I am capable of doing these things but was just too lazy. Now I try to do most myself and only get a professional if it is dangerous or I don’t have the tools. We also reduced the domestic services that we had.
Groceries we managed to decrease slightly which is not bad considering food inflation has been quite high. This also includes pets of which we have many, but that is our choice. To be honest we are still spending too much here. Now in 2020 we have made some good progress and I plan to do another post on that too.
The overall cost of communication is decreasing as data costs come down so I would expect to see a saving here. BUT and this is a big BUT, don’t fall into the cellphone upgrading cycle and waste your data when you could rather use wifi. We have resisted upgrading phones and only replaced them when they broke.
We also made sure we had the right contracts that didn’t incur out of bundle charges. This was after both of us had received large out of bundle rate bills before. Wifi is everywhere so with a little bit of effort and right setting on your phone you can keep your data costs down. There are thousands of rands to be saved here.
Education spend is one area that has been increasing. Mainly as our son gets older there are more fees and costs as this also includes his sports and school activities. If there is one area you should spend then it is education but there are limits. You must be happy that you are getting value here and be happy that there is no waste.
Recreation and Health
These two speak to well being and being fit and healthy so it is not a focus on saving for me. As long as it stays fairly small it is fine but I can’t keep on spending more.
Resturants and Travel
We do not eat out a lot and very seldom have takeaways so we manage that part well. The travel portion will go up as we will do some holiday trips from time to time. When we do though I will always look for the most affordable way to do it, a lot is camping or self catering and never in hotels.
Furniture and Home and Clothes
This is an area where many people can spend a lot of money. I used to be a big clothes spender, but that changed. Here we have consciously avoided spending. Most of the clothes again are for my son as he grows up.
For me I don’t do clothes shopping and hardly buy clothes, only to replace something. My wife is very conscious of this too. For our home we keep it simple and functional. Only buying or making improvements that we really need and will make a big difference for us.
Keep Tracking Your Expenses
The first step to financial freedom was to track our expences and interrogate them to find opportunities to save. Initially it will be the big and easy to solve items. This is an ongoing process that should never stop.
Now 5 years later I continually review everything and look for opportunities and new areas to focus on. Food and other services are areas that I am focussing on now in 2020.
5 First Steps to Financial Freedom
Pause, stop spending just for a month or two while you figure it out, question everything you spend on.
Track your spending by category housing – transport, food, eating out, entertainment, education, communication etc.
Look for saving opportunities, look for areas to save, focus on the biggest and the recurring first, cars, insurance, subscriptions.
Pay off more debt, use the savings that you find and any extra money to start paying off more of your debt.
Keep on doing it, don’t stop, keep on doing this, buying less, finding more savings and paying off more debt until there is no more debt.
You shouldn’t take any of this as advice, consult a professional financial advisor for that. This is merely what has worked for me and my experience, so what has your experience been?