This is the very first guest post on My Own Advisor. This guest post is courtesy of Kanwal Sarai, the founder of Simply Investing, who is on a conquest to bring financial freedom to all.
Most people believe that they have to work till they’re 65 years old. Some people believe that they will have no choice but to work for the rest of their lives. Then there is a minority of people who love their jobs so much they never want to quit, which is fine. But what everyone wants is freedom, the freedom to work/travel/play when and where they want, when they want.
How do you achieve freedom sooner than later? Well, the exercise is quite simple and only requires 3 steps.
Start with a graph, the Y-axis represents money and the X-Axis represents time. Plot your monthly expenses on a graph in red. These expenses should include everything (food, mortgage, car, gas, heating, electricity, mobile phone, clothes, taxes, childcare, eating out, movies, travel, saving for a new car/vacation/home….) I mean everything. For most people the graph will look like the graph shown in Figure 1 below. Generally in life you begin with little expense, then as you grow older, go to college, get married, buy a house, have kids, your expenses will start to grow. Once the kids grow up and move out of the house your monthly expenses will start to decline and then eventually level off.
On the same graph plot your monthly income from all sources except from your full-time job in green. By all sources I mean, rental income, dividends, other investment income, and income from a side business or freelancing work, interest from bonds or term deposits. For most people the graph will look like the graph shown in Figure 2 below. Generally in life you begin with little investment income, then as your grow older and start investing, or start a side business your income will grow. For some people the income continues to grow and skyrockets. For most people the income will start to level off as you get closer to retirement.
Each month or each year, continue to plot the red and green lines on the graph. When those two lines intersect that is when you can quit your full-time day job and stop working (see Figure 3). At the point of intersection your monthly income will match your monthly expenses.
How can you get there faster?
You can get there faster by:
-Decreasing your monthly expenses and/or increasing your investment income
Here are some ideas to decrease your expenses:
-Buy/rent a smaller place
-Spend less on eating out
-Bike or walk rather than drive
-Cut your cable, internet, heating, phone bills
-Buy a used car instead of a new one
-Reduce the fees you pay for your mutual fund
Here are some ideas to increase your investment income:
-With the money saved by cutting your expenses you can invest more
-Forget mutual funds and learn about value investing
-Start a side business, or start freelancing
I know this may seem impossible at first, however when you go thru the 3-step process you will start to make the necessary changes in your life to bring down expenses and increase your income. Before you know it you will have achieved financial freedom sooner than later.
My Own Advisor: I couldn’t agree more with the straightforward advice to “get there faster” by decreasing monthly expenses and/or increasing investment income. Long term, I hope we can do both! We’ll see over time won’t we readers? 🙂
About my guest:
Kanwal Sarai, is the founder of Simply Investing, and on a conquest to bring financial freedom to all. Simply Investing’s goal is to change the world one investor at a time. Thanks for your post Kanwal!
Any questions for Kanwal?
Any questions for My Own Advisor?
@The Wealthy Canadian
Thanks Wealthy Canadian! Insurance is one thing most people forget about once they’ve purchased it. As you mentioned there are savings to be had be reviewing insurance policies. Being smart about big-ticket items can save thousands $$$.
@My University Money
You raise a good point, this process will be unique for each individual. Depending on your specific stage in life, you can choose to work longer or retire sooner. But just as Susan mentioned it is important to track your expenses either on paper, spreadsheet, or financial software.
Hi Susan, your are absolutely right it doesn’t matter how you track your expenses. The important thing is that you do track them. It surprises me that so many people don’t track their expenses at all. Years later they wonder where all their money went.
@The Dividend Ninja
Thanks Ninja, good point about liabilities vs assets. I like Kiyosaki’s definition of an asset: anything that adds cash to your pocket. A liability: anything takes cash from your pocket. He actually defines a house and car as being a liabilities.
And congrats on a great job on the guest post. My Own Advisor has superb content and you have done justice by keeping the consistency going 🙂
One idea you can probably add to decreasing expenses is to review your insurance policies each year (home, automobile, etc.) You’d be surprised what saving you can realize by say, combining auto & home insurance, or raising deductibles to decrease premiums.
I also use a magic jack for long distance and it saves me on average, about 600 bones a year.
I think if I had to manually track my expenses on a spreadsheet, I think I’d lose my mind within a week. With that being said, I track my investments religiously, but when it comes to day-to-day spending, I try to use common sense with my wallet while shopping for necessities. If I was a little quick with swiping the plastic, I could definitely see why people want to track their expenses so it keeps them in check.
Thanks for the suggestions, re: decreasing expenses by reviewing your insurance policies. You’re right, savings on those premiums can add up very quickly!
You’re like me TWC, I don’t nickel and dime my expenses but I certainly watch what I spend and even more so, watch my investments. When it comes to big ticket items for the house, or for fun, I try to be logical about things. I/we ask ourselves: “is this a want?”, “is this a need?”, “how long are we going to keep this item?” etc. We find our answers to those questions really help 🙂
As always, thanks for your contributions to the blog!
It’s interesting how we all place different values on certain things eh? I for example follow the same line of thinking you do when it comes to retiring early, and place a relatively high value on it. However, some actually want to work in some capacity until 65. There are luxuries that I currently enjoy more than I would enjoy retiring at 35, and so my retirement goal becomes 45. It’s an interestingly unique situation for each individual.
@My University Money,
I totally see where you are coming from. To be honest, if I can take a great trip or make an investment in our home that is really worthwhile, and together those expenses “put off” my retirement plans by a little bit, no big deal. I place a high value on retiring early and hopefully without debt, but I’ll always want to work at something and in some ways, things now at 37 are worth enjoying much more than at 47 or 57 or beyond, by being overly focused on retirement. To me, life is all about balance. Personal finance, is, well, personal 🙂 Thanks for your comments – off to check out your blog now!
I have tracked my expenses for sometime, first via spreadsheets and now I use Quicken. I do not think it matters how you track them, but that you do. One of the things that tracking expenses can do is that you can ensure you are spending your money how you want to spend it rather than let it slip through your fingers on things you do not care much about.
No doubt tracking your expenses helps you understand, and understanding your expenses is the key to doing something about them.
Congratulations Kanwal on your guest post..
Yes as Susan Brunner (with ove 40 years investment expereince) pointed out in my interview with her, successful investing is a two-pronged approach (1) eliminating debt and expenses, and (2) having a successful investment strategy. You need both those keys to be a successful investor. Many of the great investors are “thrifty”, that’s why they are millionaires… Mantra understands that at an early age 😉
Taking it a step further as Robert Kiyosaki points out in “Rich Dad Poor Dad” the average person uses debt to finance “liabilities”, but the investor uses debt to finance “assets”.
The Dividend Ninja
@The Dividend Ninja,
Agreed. You need to look no further than Susan’s success story for a simple, but proven recipe. Thanks for your comment as always Ninja!
Thanks Dividend Mantra! I’ve been following your story for awhile on your blog, and I know you recently sold you car to cut down on expenses. And now you’re moving into a smaller apartment? Thanks great! You are certainly on the right track.
Great guest post Kanwal and MOA!
This type of graph is something similar to what “Your Money Or Your Life” recommends. They call it a wall chart, where you include plots for income and expenses. You can get a general idea of where they will intersect by drawing out lines. The point where passive income meets expenses is the “crossover point”.
I totally agree that cutting expenses is key. It will reduce your need for money, therefore allowing you to invest faster. By investing faster, you will receive passive income faster, and you will need less of it to pay reduced expenses. It’s a wonderful thing!
I think I have done everything on the reducing expenses list. I’m actually moving into a smaller apartment in one month, which will reduce my rent by 25%, and hopefully bring my expenses down to $1,000 a month.
I hear ya. Fewer expenses + more investment income + good returns = faster financial freedom 🙂