The Roadmap to FI Series: Part One

A couple of weeks ago, I was trying to help a friend go through and organize her finances. We’ve chatted about FI before and she’s been fairly interested so she started to read several of the blogs that I have recommended to her. However, when I went over to talk to her, what she asked me was this:

Everything you’ve shown me about investing, savings rates and trimming my expenses is great, but I really just need to know, what do I even do to get started?

This got me thinking and helped me realize that most people probably don’t have a 12 tab spreadsheet with all of their finances parsed out into different scenarios and trackers that they go through on Friday night with popcorn by their side (part of me wishes this was hyperbole). Most people just need to know where to even begin. Thus, I have decided to put together a series of what I hope will be able to bring someone from financial illiteracy to becoming financially independent. Easy right? Of course.

Part Zero: Meet Jack

Throughout this series, I’ve decided to use a fictional character named Jack to help me out. Everyone, say hi to Jack.  Jack, age 26, is a personal trainer making about $50,000/year or ~$25/hr. I won’t get into too much more detail now, but Jack will be back shortly.

Part One

Imagine that trying to figure out your finances is like trying to use a roadmap while driving. Not a GPS. An old school roadmap that you have to stretch across the dash.

This is definitely safe.

When looking at a map, what is your first question?

Where are We?

You can’t get to wherever it is you want to go if you have no idea where you are starting from. In terms of finance, how exactly do you figure out where you are? Well, you need to figure out two key parameters:

  • What is your current net worth?
  • What are your spending habits and expenses?

Calculating Net Worth

Net worth has become somewhat of a ‘Bro, how much do you lift?’ in the FIRE community, but it is still an amazing metric to measure. Basically, your net worth combines all of your assets minus all of your liabilities. Gathering this data ensures that first of all you are aware of all of your assets (retirement accounts, savings accounts, the value of your home, etc.) and your liabilities (student loans, car loans, mortgage, credit cards, etc.). Second, it tells a story of how you’ve been managing your money thus far in your life. If you have some student loans, no other debts, and are building your assets while knocking off those loans, then that tells me that you’ve invested in yourself and that’s great. If you have $20,000 in credit card debt, $100,000 in student loans and a $15,000 car loan, then it looks like things have gotten a bit out of control and it’s time to get your ass in gear.

As an example, here is Jack’s net worth calculation:

As you can see, adding up all of the assets and taking away the liabilities is where you arrive at Jack’s net worth value of $22,830. Not too shabby Jack.

Your Action: Find all of your accounts and major assets. Log into every account and write down the amount you have in that account. Then look for all of your loan and credit card amounts and pull off that information. Put that in an adjacent column. Total them both up and then subtract the liabilities from the assets.

This is your point A on your journey to FI. It doesn’t matter if it’s a low number or even a negative number. All that matters is that this is your number and this is where you start your journey.

Tracking your Spending

“It’s so much work. Why do I have to track my expenses?” I get it. Most people don’t really like this stuff and it’s okay if you don’t. Setting it up takes a while and it’s a pain; plus it airs your dirty laundry. If you have been spending $200/month on takeout without realizing it, this is where that all comes out.

The easiest way to do this is to use a budgeting/expense tracking tool like Mint. This will take your credit card expenses and withdrawals and automatically categorize them into some nice neat charts for you. Many people use this method and it works very well for them. Personally, I don’t prefer the way they divide expenses and have created a spreadsheet showing how my expenses split out on my own. I then just add in my expenses as I make them so it never takes up too much time. I’ve made a same spreadsheet for Jack.

As you can see, there are some areas that Jack goes over budget and some where he goes under. For example, his January car services/taxes line item far exceeds his budget because his car taxes were due. However, more important than the budget itself is that he sees exactly where his money is going and can make adjustments as needed.

Your Action: Look through your expenses from the last 3 months and separate them into categories that make sense for your life. It is important to note that your categories can be different than someone else’s. It’s to be expected honestly. This is a personal choice and I will not dictate what categories you must track or not. However, I will provide some examples of these categories here:

  • Rent or Mortgage Interest
  • Mortgage Principal
  • Utilities
  • Gas for Car
  • Groceries
  • Eating Out
  • Cell phone
  • Car Insurance
  • Car maintenance
  • Entertainment
  • Clothes
  • Travel
  • Healthcare
  • Home maintenance

After you have your categories figured out and expenses placed into each category, take a look at what you really spend on everything. Does your spending align with your values? Is spending $200 a month on takeout worth the extra couple of years sitting at your cubicle that it will take to pay for it?  No one is going to judge you but yourself here; so it’s time to get brutally honest with yourself and make sure that you’re spending your money on what matters to you.

That’s a Wrap

Once you know what your net worth is and you know where you are spending you money, you can take the next steps to change any spending habits that don’t align with your values. If you value your family and don’t have enough money to go on a family vacation together, but have an $800 car payment, it may be time to reevaluate some of your choices. The way you spend your money is a reflection of the direction your life is going. Now you can get a clear picture of that direction. So, where are you going?

How did your expenses shape up? What did you learn about where you are on your Journey to FI? Let me know in the comments below!

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