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The goal of any self-respecting freedomist is to free himself or herself from the tyranny of financial dependency. When you have to work in order to survive, you’re financially dependent. When you don’t have to work, when you only labor because it suits your whim or excites you, you’re financially independent.
To achieve financial independence (FI for short), you must save enough money to live on the interest or return that your savings generate.
And how much savings do you need?
A good rule of thumb, supported by at least two financial bloggers that I respect (see here and here), is this: To achieve FI, you have to accumulate at least twenty-five times your annual expenses. Thus, if it costs you $25,000 a year to feed, clothe, house, educate, doctor, and entertain yourself, you’ve achieved FI if you have saved more than $625,000. If it costs $50,000 a year to feed, clothe, house, educate, doctor, and entertain yourself, you’ll need to save at least $1,250,000 to be considered FI.
The nice thing about this FI definition is that it’s fair to everyone, regardless of income. Someone who lives and works in Tupelo, Mississippi, shouldn’t be considered poor or a failure because he or she hasn’t accumulated the savings of a wealthy Manhattanite. Likewise, it’s not fair to consider a Manhattanite “rich” because he or she makes three times as much as the typical Mississippian. Consider a four-person Manhattan household that takes home $150,000 a year. It could easily cost this household $145,000 a year to feed, clothe, house, educate, doctor, and entertain itself. A similar four-person household in Mississippi may take home $50,000 a year and require $45,000 to cover its annual expenses. Now let’s further suppose that our Manhattan household has saved $800,000 and our Mississippi household has saved $400,000. Which household is closer to FI? The answer of course is our Mississippi household. It has reached thirty-five percent of our FI threshold. Our Manhattan household on the other hand has only reached twenty-two percent of our FI threshold. This calculation could change in a heartbeat of course if our Manhattan household decided to move to Mississippi. But I think you get my point. FI hinges on annual expenses and savings.
Another nice thing about our FI definition is that it doesn’t require a herculean effort to achieve. Anyone with reasonable effort, planning, and discipline can do it. It may take the average person three decades to achieve, but it’s doable.
The first step on your road to FI is to acquire a firm understanding of your expenses. Without knowing what’s going out the door, you’re flying blind. After all, how can you save twenty-five times your annual expenses when you don’t know what your annual expenses are? How can you begin to make progress toward FI if you’re spending more than you take in? Only with knowledge will you be able to adjust your behavior (your financial habits suck) or stay the course (your financial habits are awesome). Tracking your expenses will vastly increase your financial knowledge.
Make no mistake: tracking your expenses isn’t fun. But there are ways to mitigate the pain.
One way to mitigate the pain is to use an online app. Mint and Dave Ramsey offer great budgeting tools for free. But these tools strike me as overkill. First, Mrs. Groovy and I make about 70 spending transactions per month. Roughly 20 percent of those transactions are recurring. They’re the same every month. Tracking them is a no-brainer. That leaves roughly 56 distinct transactions per month, a little less than two a day. Now, do I want to create another online account, get another username and password to manage, and place the logins to all my financial accounts on another site that might attract the interest of Chinese hackers, all to avoid the drudgery of manually tracking two spending transactions a day?
Mrs. Groovy and I decided to go the DIY route. We created a simple expense tracker in Google Sheets. Our spreadsheet is far from awesome. But it has some nice features to minimize the pain of data entry and it can be shared online (via Google Drive). More importantly, it works for us. Perhaps it can help you.
You can download the tracker by clicking the below button. You can also view a user guide by clicking the link below or going to our Financial Freedom Blueprint page.
Once downloaded, you can use our tracker with Excel (2010 or higher) or Google Sheets (you’ll have to upload it to your Google Drive account).
Let us know what you think. We would appreciate any feedback.
Download GroovyExpenseTracker-1.xlsx
Nice tool you have built…I think people should use whatever keeps them motivated to work on it.
When we first started we went old school and used pencil and paper for a while to make it more real. Once we got things under control we started using Mint and Personal Capital…I quickly log-in to both daily on my phone to get a snapshot and check to see if any shenanigans are going on. I use Mint strictly for budgeting/tracking expenses (it’s what I use to do my monthly reports)and PC for tracking net worth and dividend payments, etc.
Have a great day Groovys!
Hey, Chad. Thanks for the kind words. Our simple DIY tracker works for us. We played around a little with Mint. But I got lazy and didn’t feel like entering all my financial accounts. When we retire, Mrs. Groovy and I plan on reviewing Mint (again) and Personal Capital. We’ve heard a lot of good things about Personal Capital. I hope you won’t mind if start pestering you with questions about both apps in the future. Thanks for stopping by. Always appreciate your thoughts.