Week 2: Cashflow
The main thing we want you to get out of week 2 is the importance of tracking your spending. Do you know where your money goes each month? Are you spending money on things you don't even like or use? Are you getting value from your spending? Let's plug any leaks and have a strong finances ship. WOOT WOOT
We also talked about the rule of 173 and 752 which show the true cost of monthly and weekly expenses over 10 years if you had invested the money instead.
I've written a blog post all about this: what do you spend your money on?
Week 2 homework
To get the most out of this course you must do the homework! The most dangerous words when you're learning something are "I know that". None of this is rocket science. You might know this but are you actually doing it?! Are you implementing?
So here is the homework for week 2... We're looking at April to start with because it's the last complete month. This is something you should do monthly as part of your monthly finance meeting. More on this in week 5.
1. How much did you spend in April?
This might take some detective work. Maybe you'll need to look at multiple bank statements or credit cards. Stick with it! Thankfully there are some tools to help you.
If you're in the UK you might like to use money dashboard. That's the one we use but there are other tools that do the same thing. It's completely free. You link it up to your bank accounts and credit cards and it pulls through all your transactions into one place so you can see what you're spending in total. Katie and I look at our total combined spending so link all of our accounts into one money dashboard account for both of us. It's up to you whether you do this individually or as a household.
If you're in the US there's mint or personal capital
We don't care how you do it. You might already have a spreadsheet that does this! Just do it!
2. Work out your savings rate for last month. What percentage of what you earned did you save?
You need two numbers to be able to do this.
A) How much you earned in April
B) How much you spent in April. You just worked this out! YAY
Then you compare how much you earned (this is after tax by the way) and how much you spent to give a percentage of how much you kept/saved.
For example, if you earned £1000 and spent £800 then you saved £200 and your savings rate is 20% (200/1000). In this example you are using 20% of what you earned to buy freedom.
Katie has made a spreadsheet template you can fill in each month that will automatically work out your savings rate for you. The template also allows for contributions you make to your retirement savings through your wages. The template is included in Alan's blog article about savings rate, click below to have a read and download the template...
Savings Rate Blog Post
Why bother?!
Your savings rate is directly linked to how long it will take you to get to retirement. We'll cover this more when we come on to FIRE principles in week 8. If you'd like to read ahead now check out this article by Mr Money Mustache
Optional additional homework.
For the keenos amongst you there is some additional optional homework. Feel free to do as much or as little as you want. Pick and choose which exercises are most meaningful for you.
3. Categorise your spending for last month
For each item you bought/spent money on in the last month, categorise it so you can see what areas you're spending your money on. Money dashboard has its own categories that you can use or you might like to come up with your own. I've listed the ones we use below. Choose categories that are meaningful to you, ours are particular to our lifestyle and what we typically spend money on. By all means use ours as a starting point but you'll probably need to adapt them...
• Accommodation - Airbnb and hotels
• Eating out - Restaurants and discretionary naughties
• Groceries - Food we buy to cook at home
• Education - Books, courses, videos
• Transport - All car costs (insurance, services), flights, train, public transport, car hire
• Clothes - Clothes, footwear
• Entertainment - Cinema, shows, cooking courses, spas, fun stuff, renting movies, Thai massages
• Health - Prescriptions, gym, CrossFit, dentist, optician
• Misc - Cash, gifts, other random stuff, cleaner
4. Did you get value from what you bought last month?
Look down the list of what you bought/spent money on. Did you get value from it? Was it a waste of money? No judgement here, just noticing and this is your chance to change things if you want to.
5. Did you spend in line with your values last month?
What do you value in life? What do you get joy from? Does the money you spend bring you joy? What brings you happiness that you could spend money on if you wanted to?
Discussion questions
So that you have them all in one place, here are the questions we discussed during week 2's call that will help you to think about cashflow further.
Plugging the leaks
Ask for help
Remember to reach out in the Facebook group with any questions you have or if you get stuck. Don't let confusion be an excuse for not progressing with this stuff. We are here to support you!
We also talked about the rule of 173 and 752 which show the true cost of monthly and weekly expenses over 10 years if you had invested the money instead.
- Multiply a monthly cost by 173 to see the true cost over 10 years.
- Multiply a weekly cost by 752 to see the true cost over 10 years.
I've written a blog post all about this: what do you spend your money on?
Week 2 homework
To get the most out of this course you must do the homework! The most dangerous words when you're learning something are "I know that". None of this is rocket science. You might know this but are you actually doing it?! Are you implementing?
So here is the homework for week 2... We're looking at April to start with because it's the last complete month. This is something you should do monthly as part of your monthly finance meeting. More on this in week 5.
1. How much did you spend in April?
This might take some detective work. Maybe you'll need to look at multiple bank statements or credit cards. Stick with it! Thankfully there are some tools to help you.
If you're in the UK you might like to use money dashboard. That's the one we use but there are other tools that do the same thing. It's completely free. You link it up to your bank accounts and credit cards and it pulls through all your transactions into one place so you can see what you're spending in total. Katie and I look at our total combined spending so link all of our accounts into one money dashboard account for both of us. It's up to you whether you do this individually or as a household.
If you're in the US there's mint or personal capital
We don't care how you do it. You might already have a spreadsheet that does this! Just do it!
2. Work out your savings rate for last month. What percentage of what you earned did you save?
You need two numbers to be able to do this.
A) How much you earned in April
B) How much you spent in April. You just worked this out! YAY
Then you compare how much you earned (this is after tax by the way) and how much you spent to give a percentage of how much you kept/saved.
For example, if you earned £1000 and spent £800 then you saved £200 and your savings rate is 20% (200/1000). In this example you are using 20% of what you earned to buy freedom.
Katie has made a spreadsheet template you can fill in each month that will automatically work out your savings rate for you. The template also allows for contributions you make to your retirement savings through your wages. The template is included in Alan's blog article about savings rate, click below to have a read and download the template...
Savings Rate Blog Post
Why bother?!
Your savings rate is directly linked to how long it will take you to get to retirement. We'll cover this more when we come on to FIRE principles in week 8. If you'd like to read ahead now check out this article by Mr Money Mustache
Optional additional homework.
For the keenos amongst you there is some additional optional homework. Feel free to do as much or as little as you want. Pick and choose which exercises are most meaningful for you.
3. Categorise your spending for last month
For each item you bought/spent money on in the last month, categorise it so you can see what areas you're spending your money on. Money dashboard has its own categories that you can use or you might like to come up with your own. I've listed the ones we use below. Choose categories that are meaningful to you, ours are particular to our lifestyle and what we typically spend money on. By all means use ours as a starting point but you'll probably need to adapt them...
• Accommodation - Airbnb and hotels
• Eating out - Restaurants and discretionary naughties
• Groceries - Food we buy to cook at home
• Education - Books, courses, videos
• Transport - All car costs (insurance, services), flights, train, public transport, car hire
• Clothes - Clothes, footwear
• Entertainment - Cinema, shows, cooking courses, spas, fun stuff, renting movies, Thai massages
• Health - Prescriptions, gym, CrossFit, dentist, optician
• Misc - Cash, gifts, other random stuff, cleaner
4. Did you get value from what you bought last month?
Look down the list of what you bought/spent money on. Did you get value from it? Was it a waste of money? No judgement here, just noticing and this is your chance to change things if you want to.
5. Did you spend in line with your values last month?
What do you value in life? What do you get joy from? Does the money you spend bring you joy? What brings you happiness that you could spend money on if you wanted to?
Discussion questions
So that you have them all in one place, here are the questions we discussed during week 2's call that will help you to think about cashflow further.
Plugging the leaks
- What do you regularly spend money on that you don’t use?
- Do you have any subscriptions you could cancel?
- Use the rules of 173 (for a monthly expense) and 752 (for a weekly expense) to work out how much better off you will be in a decade
- How much do you spend a week on takeouts and eating out. What is the true cost of your habits?
- What do you value?
- Are you spending on anything you don’t value?
- What spending brings you the most joy?
Ask for help
Remember to reach out in the Facebook group with any questions you have or if you get stuck. Don't let confusion be an excuse for not progressing with this stuff. We are here to support you!
