Why would someone on $250,000 a year never be able to retire? Because they’re spending $260,000. They’re always chasing debt.
At a certain level of income, your basic needs are met – food, housing, clothes, utilities,
public transport. If you earn beyond this level of basic needs, it’s up to you as to how soon you reach financial independence. Every dollar you earn above your basic needs is a choice between spending the dollars today, and investing the dollars in your future. It is a careful balance, requiring some planning and a little bit of willpower. The truth is that most people on an average income can reach financial independence or retirement a lot earlier than they may assume and it all comes down to expenses.
Here are some very basic calculations I did to see how my expenses would impact my
financial independence. For these, assume a withdrawal rate of 4% (ie. how much you withdraw from your wealth each year post-retirement) and a real interest rate about 3% (ie. how much return you receive on investments above inflation). These are true for all levels of income after you first begin saving:
- If you spend 100% and save/invest 0% of your earnings, you will never retire!
- If you spend 90% and save/invest 10% of your earnings, you will reach financial independence in 70 years
- If you spend 75% and save/invest 25% of your earnings, you will reach financial independence in 40 years
- If you spend 50% and save/invest 50% of your earnings, you will reach financial independence in 19 years
- If you spend 25% and save/invest 75% of your earnings, you will reach financial independence in 7.5 years
- If you spend 10% and save/invest 90% of your earnings, you will reach financial independence in 2.7 years
After seeing these numbers and adjusting for different incomes and expense levels, I realised two key things:
- Your savings rate is key to financial independence. Depending on your situation, improving your savings rate (% of income not spent) may be more easily achieved by either earning more and maintaining expenses or by spending less and maintaining earnings. My current income as a full-time teacher allows me to easily meet my basic needs and more, so I have found that cutting $100 from my regular expenses is more easily achieved than regularly earning an extra $100 (up to a point!). For an extreme example of expense minimisation and achieving early retirement, check out http://earlyretirementextreme.com/ . This level of cost-cutting is not achievable or desirable for everyone, but it does give some insights into the importance or the savings rate and how to find ways to significantly reduce expenses.
- An additional dollar saved is more powerful than an additional dollar earned, in
the quest for early retirement. To understand this requires a little maths. Lets say you’re saving 0% and then you cancel your unnecessary, expensive cable and gym memberships and now you’re only spending 80% of your income, your savings rate is 20%. But your mate who also saves 0% thinks that’s a terrible idea and instead takes on additional work which increases their income by 20%, and they don’t increase any expenses, their savings rate is only 16.5%. Looking at the calculations above, its clear to see you will be retiring before your mate, even though they’re on an income 20% higher than yours.
What is best for you will depend both on your current level of income and expenses, and which approach to increasing the savings rate is most easily attainable whilst maintaining a sufficiently good quality of life. Though for many people, myself included, there are ample opportunities to reduce expenses and improve our savings rate to achieve our wealth and retirement goals sooner.
A simple calculator play around with to understand the impact of savings and expenses can be found here – http://mustachecalc.com/#/calcs/time-to-fi and I have a bunch of other useful tools described on my page: 10 great tools for crunching the numbers.
As a 9-5er, Sunday is about reading, walking, picnicking with friends, nursing a hangover, catching up on sleep and laundry. But a really great Sunday can also help set you up for an awesome and wealth-wise week. Here are a couple of things I try to do most Sundays to fire me up for a new week:
- Make a big batch of lunches (45minutes – save $45) – I love cooking and I love cooking beans, which are an excellent food to reheat at work with some rice and smoky hot sauce. As part of Sunday dinner prep, I throw the rice cooker on (best $15 you will ever spend), and then chop up onions, garlic, veggies, fry it up with choice spices (cumin, smoked paprika, cinnamon, oregano), add some tinned tomatoes and tinned beans, and after about 30mins of cooking you have excellent lunches for the whole week. Just whack a serve of rice and beans into five tupperware containers and bam, healthy, cheap lunches for the week! If you don’t like beans and rice, there are heaps of other options – sandwiches, pasta, curries – whatever you like cooking and love eating. Either way, you will save heaps by not paying for lunch at work and likely eat a much healthier meal.
- Stock the fridge with healthy and nutritious snacks – I tend to do a shop on Sunday and try to make sure there is a good abundance of fruit, nuts, veggies and dips in the fridge to make sure that I have plenty of great snacks to take to work and avoid the mad rush to the takeaway kebab joint in the afternoon when a 5pm-hunger starts to kick in.
- Put a water bottle in your bag – you never know when you will need a drink, and there is pretty much always a tap to be found somewhere to fill up. This always saves me cash as I never need to buy bottled water and reduces my impact on the environment from massively energy intensive and wasteful plastic bottles. Win-win!
- Check your expenses for the week and put that into your spending account – I like to take a few minutes to think about what I will be spending during the week (groceries, petrol, pub meal etc.) and just transferring that amount into my debit card account. This allows me to pre-plan and figure out strategies to reduce overspending (for example, if I know I will be meeting friends at the pub in the evening, I might decide to have dinner at home first then only have a drink when I’m there to avoid the $20-odd cost of the meal).
- Make a mini-FIRE goal – financial independence and early retirement (FIRE) is a stretch goal of mine, so to motivate myself I set a little financial goal for myself that week to help me along that journey – it might be an action related to a bigger monthly/yearly project to build new habits or simply something I’ve been wanting to try out to see how it fits with my life. It also helps to reinforce why I’m spending the time to do the things above.
- Get to bed early! – there is nothing worse for destroying self-control and laying the groundwork for credit card carnage than tiredness. With weeks seeming ever more busy, I find that if I don’t get a decent sleep on Sunday, it is extremely hard for me to catch up during the week. It definitely can be tough to get to be early on Sunday when you’re beginning to think about work, plan the week but still trying to enjoy the weekend. I find that making sure I get some decent exercise in, some sun if possible, limiting alcohol and screen-time and eating relatively early all set me up for an excellent Sunday sleep.
Is there anything you get up to on Sunday that sets you up for a stellar week? I’d love to know!
After months of being frustrated with Personal Capital being limited to the US, I found the Australian answer for tracking all your investments, spending and bank balances – MoneyBrilliant!
It allows you to link all your accounts from regular banks, credit cards, superannuation funds and managed funds to the app using Yodlee (bank level security application). With this info, the app compiles and categorises all your income and spending transactions, providing you with both a broad overview of spending habits and detailed information about specific categories of spending. This is great for tracking where your cash is going. Along with general spending, changes to investments are tracked and compiled into an overview of your net worth.
You can also set up budgets and financial goals and track your achievement of this. I’ve only just started using it, but by automatically compiling and calculating my financial data, it will save me heaps of time and give me real-time info about how well I’m going towards achieving my goals.
Here is what you’ll see on the dashboard when you log in. You can add additional features, and up in the top right hand corner you can see drop down menus to do more in-depth analysis and planning.
A little down the track I’ll update this based on more thorough usage. Check it out for yourself and let me know what you think!
For the past couple of months, I have been calculating my net financial worth (total assets – total debts) to make sure I’m on track with my financial goals and motivate me to continue to spend wisely and invest savvily. I use an adjusted version of J. Money’s Early Retirement Spreadsheet to keep track of everything. This is my first update for this blog:
Here is my first NW update for this blog:
- Cash Savings (High-Interest Account) $5010
- International Index Fund $6620
- Managed Funds $7210
- Superannuation $24410
- Acorns App $360
- Credit Card -$940
TOTAL Net Worth: $42670
With all my net worth calculations, there is ONE BIG CAVEAT – I don’t include my student loans (‘HECS’). This is because (currently) in Australia, this loan is provided by the government and only required to be paid back if earning over $54,000 (2016), it is indexed to inflation which is currently around 1.7%, and repayments are taken out pre-tax. So to make things simpiler I just assume my actual take-home pay is less my HECS repayment, and I don’t bother making additional repayments as I can make more than 1.7% leaving the cash in my high-interest savings account, making it a net gain. This may change in the future though, at which point I will adjust my calculations!
Financial Goals for April
March was an expensive month – car registration and servicing, new camping gear, climbing gym membership and a Kindle! I really want to reign in that spending and focus on using my time on productive and enjoyable, but frugal activities like walking, reading, snorkelling, picnics and biking, which are all great for my favourite time of the year – Autumn! My specific financial goal is to add an additional $2500 to my net worth, and break through the $45,000 mark.
I love numbers! And I really love playing around with calculators and spreadsheets to help me plan and manage my money. Here are some of my go-to tools for planning:
Calculating Your Net Worth
Determining your net worth (total assets less total debts) is a really powerful way to get an overall sense of your financial position. You don’t need a calculator to do this – in fact write it down on a big piece of paper will make more of an impact (here is ASIC’s online one anyway. This number gives you a clear understanding of where you need to focus your money goals – debt reduction or wealth building. Armed with your net wealth, income and investment returns, you can use the tools below get a better sense of when you might reach the holy grail – financial independence (and early retirement)!
Budgets Are Sexy Spreadsheets
As my go to, big-picture financial tracker which helps to motivate me to save and invest to reach my early retirement goal, I use the BaS Early Retirement Spreadsheet (.xls download). There are a bunch of other spreadsheets compiled by this blogger which can be found here Best Budget Templates.
ASIC’s Money Smart
The ASIC Money Smart website has some excellent calculators which are handy to get a sense of how changing your spending/saving/investments/super will impact your wealth in the long term.
To check out the list of calculators and tools go here: https://www.moneysmart.gov.au/tools-and-resources/calculators-and-apps
Some of the top picks are:
Other handy calculators:
I’d love to know if there are any great tools, apps or calculators you use to plan and manage your path to financial freedom.
Have you recently completed a degree in teaching, early childhood education, nursing, mathematics, statistics, science or midwifery AND since become employed in a job that matches your degree qualifications? If so, then you are probably eligible to have your HECS-HELP tax that gets taken out of your pay, returned to you for up to 260 weeks (5 years).
Whilst it is great to get rid of your HECS-HELP student loan, unlike those in the US, the cost of the loan in Australia is relatively cheap (that said, the actual loan itself is often very big!) – it increases by the CPI every year, which was 1.7% in 2015, making it the cheapest loan you will ever get. This means that if you can make more than 1.7% returns from investing your money rather than paying your HEC debt, it makes sense to get the refund and invest rather than paying down your HECS.
How would you go about making more than 1.7% on your money? It’s not particularly hard, just open an online savings account (think: ING, uBank), and you are likely to make over 3% (or a real return of nearly 1.5%). If you invest in an index fund that tracks the market, on a long-term average you are likely to make 5-7% (with a real return of 3-5%).
For more info check out the official ATO website, which includes the application process, or StudyAssist which provides additional details.
This scheme could help you put $10,000+ dollars back into your pocket in the early part of your career and financial journey, right when you need it most.
I love to research. I read the PDS (product disclosure statements) of all the potential financial services I choose. I like to know what I’m in for. So based on the many hours of research I’ve undertaken, here are the accounts I use to manage my money and future…
- Everyday account – ING Direct: I use a combination of a regular Orange Everyday account. By depositing my salary in there, I get 2% cashback on payWave/TapnGo purchases under $100 (which is about $300 per year – a pretty good return for tapping!), and free cash withdrawals at any ATM in Australia (they refund the cost of withdrawing back to your account instantly), which comes in handy very often –> in total these benefits save/make me about $500/year.
- Savings account (emergency cash) – ING Savings Maximiser: This account in linked to my Orange Everyday, and by depositing my salary (or more than $1000/month from an external account), you get 3.50% interest, which is the top rate you can get in Australia at the moment aside from term deposits greater than 12 months. The added benefit is it is instantly accessible, and the ING app is extremely easy to use.
- Investments – Shares: I don’t invest in individual shares. I don’t have the time or nerves to deal with that. Instead, I use both a passive and actively managed funds to (hopefully!) make my money work for me. For my passive (‘index’) fund, which includes investments in a broad array of large company shares that effectively mirrors the movement of large sharemarkets, I use the Vanguard International Shares Index Fund (Hedged). This is ‘hedged’, meaning that it roughly avoids the impact of exchange rate fluctuations, and only increases/decreases due to share movements. I also have money in an actively managed fund, which might make other personal finance blogs squirm in their virtu-worlds, but it is to help align my investments with my ethical views. The second investment fund that I use is Australian Ethical’s Australian Shares Managed Fund, which avoids investments in environmentally and socially degrading companies and has performed extremely well over the past couple of years, even when fees are considered (relatively high compared to index/passive funds). I have an automatic transfer that sends a set amount into these funds each week. This helps to smooth out the ups and downs of the markets and ensures instead of trying to play the market, I focus on building my wealth.
- Investments – Acorns: I have recently started using this app and I can say it is excellent. It allows you to either invest a small ($5 and above) amount on a regular basis (daily to monthly) or to ‘Round-Up’ your expenses to the nearest dollar and invest the difference – this requires you to link it to your expenses account. The fees are relatively expensive, $1.25/month up to $5000, then 0.275% when above $5000. Despite this, it has gaming elements and shows real-time performance of your investments. It allows you to pick a specific investment profile with a varying mix of shares and bonds, which will depend on your appetite for risk and investment timeframe. I like it for the ability to invest small amounts daily and to watch your money working.
- Superannuation – First State Super: If you haven’t rolled your super into one account yet – stop reading now and do it! (Check out the ATO SuperSeeker to do it online – you will need to signup for myGov). I would then suggest going with your industry’s super fund, as high fees of many funds significantly reduce your final superannuation balance. I go with First State as it is the teacher’s super fund, and I have a split 50% Diversified and 50% Ethical Diversified balance – with the ethical fund performing better over the past few years!
- Credit cards – 28Degrees: This is the card to use for international purchases. I only really use it for automatic bills, when I purchase online and on overseas holidays. When travelling overseas, load it with cash so it has a positive balance to avoid interest charges.
Check these out for yourself, they have really helped me to consolidate and grow my wealth. Any suggestions for things you use to help manage your finances and accounts let me know!