Manage ExpensesHaving an understanding of your normal everyday living expenses is a critical element for achieving Financial Independence. This FI secret and mastery of its power cannot be stressed enough. Most people have a limited view of their daily and year-to-year expenses and wonder why they are not able to save more for their future. This is where tools that tie into your banking and credit card accounts that track your spending patterns is helpful. Tracking expenses does not have to be a tedious task. Tracking could be performed just a few times to establish a nominal baseline and then periodically to determine any trends or anomalies. Here are a few banking tool favorites to help with your expense understanding. Basic "Necessary" ExpensesBasic expenses are clearly what might be categorized as "necessary" living expenses which depends on your lifestyle, your living location, your habits, among other things. And, it is totally up to you to modify, reduce, curtail, limit, alter, redefine, or so on and so on. In other words, your basic expenses can be examined with great scrutiny to determine what truly is "necessary" for you and your family and what is superfluous, unnecessary, or needs revision.
The effort you make to understand your basic needs (i.e., your expenses) and control these expenses will greatly increase the odds of you reaching Financial Independence. And, since future projections are based on your current total basic expenses amount and adjusted by inflation, it is important to accurately determine it. Examples of necessary expenses include:
Other ExpensesExpenses that may not be categorized as necessary can be considered as a single or reoccurring expense added to the basic expenses. Examples of single or reoccurring expenses include:
Note that "Re-payment of any debt" is not included in the basic expenses. For the purposes of FI, repayment of a debt is not a normal basic expense subject to inflation for the purpose of projecting into future years. For debt repayment, the debt is certainly a mandatory expense that must be paid off ASAP, because holding debt is very costly. Just to be very clear, loans cost considerable money. Interest rates on common credit cards can be as high as 18%. Home Equity Line of Credit (HELOC) interest rates are 4 to 7% per year. And, student loans cannot be forgiven or waived even in foreclosure.
Credit cards are nice for convenience and help build your credit rating, but the best advice about credit card use is to pay it off completely every month and never carry a balance. If you do, it will cost you 18% or more. Reference Information |