food (home groceries from supermarkets, including household consumables)
food and drink (eating out at restaurants/pubs)
phone/broadband/mobile
TV licence and subscriptions
other subscriptions (gym, magazines)
clothing, healthcare and beauty
holidays and days out
car and transport costs (loan payments, petrol, servicing, train fares)
gifts and presents
unknown spending
Similarly, you need to do the same with income and in most cases this is much simpler, particularly if you’re in full-time or regular employment. If you’re contracting or have variable income (for example, through overtime or commissions-based sales, or are self-employed) take an honest view over a reasonable period of time. Typically, categories might look like this:
income from main employment
savings interest (or cashback)
benefits (eg child benefit, child tax credits)
other income (such as part-time work, second jobs or ‘side hustles’)
gifts
There are several budget tools and templates available online to help you with this, although the categories above should be sufficient for now. Don’t worry about setting a ‘budget’ at this point; what’s important is to know what you spend now before you can tackle how and where you can reduce your spending.
Spend less, earn more, invest wisely
Over the next few chapters, I’ll tackle the three core elements of spending less, earning more and investing wisely. The fundamental part of spending less (after knowing what you spend) is realising what you’re overspending on. There are the essentials: food, a roof over your head, electricity, etc. But we live in a highly commercialised society and the pressure to make additional or discretionary spending is ever present. This spending isn’t really necessary and there are many tricks (or marketing strategies) that companies use to encourage us to spend more. What’s more, whatever ‘it’ is, they also manage to convince you that you do actually need it, it’s great value and you should congratulate yourself for buying it! Needless to say, I disagree with a lot of this and will walk you through some of these marketing concepts to help you rethink what you spend your money on, with the ultimate goal of helping you to spend less.
The flip side of the coin is how to earn more. I’ll explore how to build a career plan, or at least to manage your career path with the objective of earning a better base salary, with methods of achieving regular, incremental increases. Unfortunately, the last time most of us were given any career advice was at school but this wasn’t really the best time for it, not least because we probably didn’t really know what we wanted to do and were more interested in getting our first girlfriend or boyfriend or passing our driving test. Think of the ‘Earning more’ chapter as revisiting your careers advisor but at a time when you’re more likely to understand the impact of your choices and decisions and you’re in more of a position to act on them. And don’t worry if you don’t have A-levels or a degree – experience, attitude and approach will advance your career more than qualifications on a piece of paper.
Having started to explain how to better manage your money and increase your confidence in making sound financial decisions, it’s worth pausing to talk a little about motivation. I’m not a motivational coach, but I can share with you learnings from my own experience – however, you’ll have to figure a bit of this out for yourself. You need to think about what motivates you because if you’re going to follow a long-term plan, it’s more likely to succeed if you tailor your approach to match what motivates you. This isn’t exactly scientific but it’s about knowing what holds your interest; it might be as simple as a straightforward goal such as paying off your mortgage by the time you’re 50, or clearing your credit card debt by the end of the year. Or it could be a little broader, such as trying not to buy any new clothes for the next year, using your car less and walking more often, or throwing away less food. Think about it and talk to your family or partner about it, as it’s not only enlightening but can also help elsewhere in your life. For example (and unsurprisingly), I hate wasting money or spending when I don’t really need to, and it’s a key motivator for me in any decision.
When I was little, I was involved in a car crash with my mum. This was long before the days of compulsory seatbelts and I was thrown forward and hit the dashboard, breaking my front teeth, which had only just come through. About 15 years later, I was in a fight at school and broke a front tooth after my head was smashed into a desk. Unfortunately, as this was already my second set of front teeth it meant having to have them capped. Everything was fine, with the cap holding firm through my teens, early adulthood and through to midlife. About five years ago, I tripped over in B&Q and landed on my face, breaking a tooth again. Over the next few years, I had to have it refitted several times, each time bonding the new tooth on less and less of the old one and each time the dentist assured me it would ‘last for years’. Since I now pay for my dentistry, I’m paranoid that it will fail again and I’ll get another large bill to fix it. This has resulted in me finally stopping chewing my nails or ‘cutting’ Sellotape off the roll with my teeth. Trying to avoid another unnecessary dental bill has definitely changed my behaviour.
One bit of homework for you to do is to work out what motivates you so that you can build this into your plan. I’ll come back to this in the section about managing and tracking your progress, in order to find and use metrics that resonate with you so that you’re more engaged and have a better chance of success. The last thing I want to do is tell you how you should do it and for you to then lose interest because it’s not aligned with what makes you tick.
On FIRE
At this stage, some of you might be thinking that all of this sounds similar to a fairly well-known movement called Financial Independence and Retire Early, or FIRE as it’s commonly called. The exact origins of the term are unclear, although many attribute it to the concepts outlined in the 1992 book Your Money or Your Life by Vicki Robin and Joe Dominguez. I’d argue that my approach is slightly different; it’s a mindset change to your way of life, how you approach financial decisions, understanding true value for money, maximising your earning potential and understanding the budget you need to live a life that’s fulfilling for you. Moreover, I don’t want to just focus on the final outcome. I’m more interested in mechanisms that get you there, the confidence you have in understanding and making good financial decisions and therefore having more control over your financial future, whatever that may be.
But let’s look at some definitions and you can make up your own mind. To many, FIRE in its pure form is about ‘ultra saving’ (maybe up to 70% of your income), living frugally and investing your savings with a view to stopping work as soon as possible, in some cases in your forties. In theory and practice, many people have done this and good luck to them. I’m conscious that we’re only on this planet once and therefore, while not being too extravagant, I believe we should always schedule some time (and funds) to enjoy ourselves. A pure FIRE evangelist might want to live on bread and water and not take any holidays but it’s a little too drastic for me and maybe for you too.
As ever, there are also variations on pure FIRE. There’s FatFIRE and LeanFIRE. FatFIRE is when you retire early and live a lavish lifestyle ever after. LeanFIRE means to retire early but with an amount that allows you to lead a lean and simple lifestyle. FatFIRE does follow some similar principles to my approach but doesn’t help you understand how finances work; instead, it focuses on some key numbers and rules. To ‘achieve FatFIRE’, received wisdom says you need to have 25 times your yearly spending in your investment portfolio. So if you wanted a ‘retirement’ or lifestyle of £36,000 a year, you’d need £900,000 in your pension/ISA/savings pot. This is a similar figure to the £1 million suggested to me many years ago, so perhaps it wasn’t that far off the mark. The assumption of FatFIRE is that you’ll enjoy a ‘lavish lifestyle’ once you’ve stopped working, whereas LeanFIRE is a more frugal version whereby you continue with a less extravagant but still comfortable lifestyle. The real difference is how quickly you can get there and since you need a larger pot of money for FatFIRE, it’s easier to achieve LeanFIRE more quickly. But in my view, it sounds like a rather dull existence. It might be right for some, and arguably reducing consumption is a good thing for the planet, but I’m still in the camp of enjoying yourself once in a while.
As you can imagine, I’m on many online forums and groups that actively discuss FIRE, but for me it’s far too technical. For example, these forums often discuss withdrawal strategies, relative investment returns from one type of fund structure over another, gilt yields in the long term and many more deeply financial topics.
This is a genuine example I came across on one UK site:
Question: If you fund your retirement from share investments (pensions and ISA), do you set up a regular sell order irrespective of what the share market is doing? If you also have three years of spending saved up in cash, do you stop your sell order when the market drops and don’t resume until your cash buffer drops to a predetermined level or when the market recovers?
One of the responses: Deciding on the split between using up your cash buffer and liquidating investments is tricky. My modelling suggests that you should use up most of your cash immediately, leaving the investments in the market but keep a smaller buffer (three to six months?) for emergencies. I tried modelling various splits between assets and cash, including adjusting the split based on market values but couldn’t improve upon using up the cash buffer initially. The spreadsheets for this were admittedly a bit messy. If you do the opposite and ignore the cash buffer to liquidate assets from the outset, the portion of your portfolio in cash immediately starts losing money in real terms and (except in a few very specific historical cases, from memory) the overall portfolio value never recovers compared to using the cash and leaving the assets to grow. It does depend on your withdrawal rate to some extent – if this is higher, then you’re more exposed to a recession as you’re taking out more assets while they’re lower in value. But in nearly all cases, recessions did not last long enough to make it better to hang on to any cash above the emergency fund.
It is a valid question and I don’t doubt the answer is a sensible one, but I lost the will to live halfway through the post. It’s way too complicated for me and as I’ve said before, I’m no maths wizard. I’d much rather have a more simple approach to finance and not spend too much time with my head buried in a spreadsheet.
So that’s a rapid overview of FIRE. While I’ve done the ‘retire early’ bit, I don’t believe the ethos of my approach is the same; I prefer to think of it as having a better mindset about money rather than just focusing on an end goal. I’m also not convinced that you can step-change your lifestyle from ultra saving to extravagant spending without it all going horribly wrong. Imagine you don’t go out to restaurants, don’t eat takeaways, don’t have holidays, rarely socialise, buy your clothes from a charity shop, go to bed at 8.00 pm to save energy and make a bar of soap last two months. In parallel, you’re throwing every spare penny into your pension, ISA or other investments. You’re now 48, you’ve got your calculator out and find you’ve hit the magic 25x multiple so you hand in your notice. What now? Go out and buy a Lamborghini, kit yourself out in designer clothes, get on first name terms with the maître d’ of your local Michelin-starred restaurant and book a world cruise? You might do some or all of these but the challenge is that your spending will be uncontrolled as your new lifestyle is alien to you. It’s like someone winning millions on the lottery and a few years later you read they’ve blown it all in a few short years on a lavish lifestyle that they’re just not used to.
Sense-checking that last thought, I’ll admit I’m not claiming to be perfect either; having worked on our plan for 20 years and more seriously for the past 10, it’s difficult to stop saving (although you’re somewhat limited, for example, in what you can save into your pension if you’re no longer working) and start spending. However, we’re learning and definitely enjoying trying! But we still use the same principles of understanding value in what we’ll spend our money on – I go back to the example of buying our BMW; we could have bought a brand new 2.0 litre convertible and spent twice as much as we did but we didn’t. We bought second hand and still intend to keep the car for five to ten years. We’re having no less fun and we still do the same monthly review as we’ve always done, so we’re comfortable we’re not overshooting ourselves. So those are the basics of how to get a grip on your finances; now let’s move on to putting it into practice.
Key takeaways
Work out your ‘ideal lifestyle’ (and what your partner wants too). This is your end goal but think about smaller, interim targets along the way.
Understand your financial position, your income and outgoings.
By all means seek financial advice but be clear on what you’re asking for and how much it will cost. As a preference, use an independent financial advisor (see Resources).
"How much was that?"
