Back to Basics Part 3: Know your numbers

So, you’ve got a good idea of what FIRE is, and what your FIRE number is; and worked out how quickly you want to get there and how soon it might be. This is the last post on going Back to Basics and explores what your journey might look like.

As with all ‘simple steps’ the pathway to FIRE depends on where you start. All the steps fall into three main categories: spend less, save and invest, and earn more. This blog will focus on working out your real income and expenses at this point in time, since this is the best place from which to build out plans to increase income, reduce spend, and work out what fabulous things you are going to do with the rest on your path to FIRE.

Simple steps to FIRE. Sometimes the view is great too. Photo by Khara Woods on Unsplash

The first and most important step is to know your numbers.

You will have looked a little at your projected costs when planning your retirement number, but the first step is to really understand what you have coming in and out.

What income do you have? For most people this is from one job, but if it isn’t this will take a bit longer to work out. Do you have other bits of money coming in – child benefit, working family tax credits, maintenance from your ex? Then what comes out pre-tax – pension, health insurance, student loan repayment, childcare vouchers?

If you are self-employed then try and work out the average of your income from previous months. You’ll need to take into account if your business is seasonal, or if you had significant up front costs in setting up your business for example, and it’s harder to project your profits / income in terms of growth. You should look to calculate your mandatory tax and national insurance if this isn’t done for you, and use your post-tax figure.

For now all you need is money you are sure of coming in, and anything that comes out pre-tax. Being clear on this means you know exactly what money you have to play with and what you might have already paid out for before it hits your account.

What do you usually spend? This needs to be a really honest view of what you spend, rather than an aspirational view where you think ‘well I keep meaning to stop smoking/buying lattes/my habit of buying clothes when doing the supermarket shop so I just won’t add that cost in and it will spur me on’. Be honest. Not only will it help you more in the long term but it also gives you spaces to win – if you do cut out a habit, you can celebrate it rather than setting yourself up to fail.

There are lots of ways to work out your spend but this is mine. For each of these costs, I have a spreadsheet which shows whether they are paid monthly/annually, by what method, and if by direct debit, when and from which account. Not everyone loves geeking out with spreadsheets – there is a simple budget planners available but whatever the approach you will need to spend some time getting your numbers together. When I was doing this I made a date night (with myself, if you are reading this and not single then do it with your partner so you are on the same page). I got some fancy tea and homemade cookies, put some music on and got down to business. (I realise that sounds dodgy. Ahem.)

Wherever you live, and however you get to and from work/life, you need to budget for both. Think of the house insurance premiums in Venice tho… Photo by Marijana Vasic on Unsplash
  1. Work out your fixed costs: This includes all the basics, which I find useful to put into categories:
    • Home: Rent/mortgage, gas, electric, water, council tax (or whatever the equivalent is where you are) and house or contents insurance. There might be more that comes in here which are fixed for you but not standard – I have boiler cover for example, others have ‘white goods’ insurance which covers washing machines and whatnot. This also might be different if you rent. The key is to make sure you capture things you pay for annually as well as monthly.
    • Transport: car tax and insurance; bus pass; bike insurance. This will depend on you but this is fixed costs so things like petrol or new tyres don’t come in here, however regular they are.
    • Debt repayments: if you have debt repayments, then the first focus will be on repaying this so you are free to throw all your income at building your FIRE stash. But for now if you do have them then they are fixed and need to be included here. Gezuntheit.
  2. Work out your essential but flexible costs: This is all the stuff which is essential but changeable.
    • Childcare: I include childcare in here partly because it changes as kids get older or you choose different kinds of provision. When you plan out your options, childcare is also something to play with since, certainly in my life, I feel an element of working to pay childcare so that my kids can be looked after whilst I work. So it’s essential but moveable in lots of different ways.
    • Health: depending on who and where you are, there might also be fixed costs here. In the UK I do wonder if we are ready for changes in healthcare costs which might be coming our way, but that’s for a different post. This could include glasses, dentist check ups, vitamins or prescriptions. Try and separate out the essentials and those things which might be optional.
    • Groceries: we all need to eat, but do we all need to eat organic chocolate almonds on a weekly basis? I suggest that here you are absolutely honest, and go back through your bank statements to see how much you actually spend. For lots of people this is a real shocker, but it’s also a place you can work saving magic.
    • Clothes: This is another one where looking at bank statements should help to work out what you spent over a year, for yourself and your family. I suggest separating these out since I have been guilty of overspending on kids’ clothes whilst telling myself I was doing no such thing because I was slopping about in 10 year old jeans. Check for a whole year so that you capture summer, school uniform, Christmas party frocks or whatever other seasonal changes you deal with.
    • Cosmetics: yes we all need some (well, probably) but this is another area which can be a few quid a month or a way of getting into debt. I did a cosmetics challenge and even though I rarely wear make up and think of myself as being pretty much a soap-and-water girl, this was an unexpected area I could make savings.
  3. Non-essentials: well, something of a mixed bag – and there are lots of things which can be mixed between essential and non-essential (even on one supermarket receipt), so be honest:
    • Gifts: again how much and how often you spend is very individual, but being clear on birthdays/Christmas or Hannukah or whatever/wedding presents and how much you usually spend in a year will help you make a plan and put any necessary boundaries in place.
    • Eating out: coffees, lunches, dinners, going down the pub. With COVID this seems like a sweetly reminiscent nod to idyllic days, but all those take away pizzas still count.
    • Holidays: holiday childcare might also go in here, depending on how optional it is. But this is all your holiday spends, from your tent to that business class upgrade.
    • Everything else. I was pretty surprised by just how much there was in here – and it’s why bank statements are your friend.
Do the hard work then get inspired – remember what it’s all for. Photo by Sergey Pesterev on Unsplash

So there you have it – you have worked out how much you spend in an average month, and on what. If you are anything like me, you might need a stiff drink (or sugar hit) at this point. But then come back and:

Get inspired for your next steps

So that’s it! You know your numbers. For me though I found that I was really comfortable having done the nerdy bit, and struggled to get onto making a budget and finding ways to cut costs. Before we go there, spend some time getting excited about what’s coming. I motivate myself by hearing from the FIRE community, and looking at photos of Kenya (ok, sometimes doing fantasy house searches) since it’s part of my ‘why‘.

I love to fall down the grocery shopping rabbit hole so beloved to FIRE. Check out Tread Lightly, Retire Early’s post on reducing the budget whilst eating better; or the FrugalWoods many posts on grocery shopping (though whilst I totally admire their choices, I don’t get the impression food is a particularly important or interesting part of their lives). I’ve previously shared Mrs Smart Money’s challenge to split a family food budget by 50%. You could also check out accounts from reducing spend over a whole year – I got Michelle McGagh’s No Spend Year and Cait Flanders’ Year of Less out of the library when such things were open but there’s lots on line. Go get your motivation on.

So, what does your spend look like, and how did it make you feel? Would love to hear from you!