Becoming Financially Savvy – The Milestones

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I’ve been thinking hard about what qualifies me to refer to myself as ‘Financially Savvy’. So, in this post is what I have determined to be the milestones that must be reached in order to achieve peak ‘Financial Savvy-ness’. It’s really quite straight forward. It’s simply an amalgamation of the things I learned about my personal finances and how to improve them. All you need is a little bit of time – a few hours should do it, and a spreadsheet. You can download my personal template at the bottom of this article. I’ll break it down as if I were talking to my lesser-savvy self, just 1 year ago.

1 – Know your monthly income.

I mean really know it. If you’re on a lone quest to FI, this will be much simpler. If you’re part of a household, you’ll need input from your other half. Involve the kids too if they’re old enough to comprehend money. I think it’s healthy to get them talking about this stuff from a young age so they don’t have the traumatic experience I, and many other students had when they first left home and learned how expensive cheese and washing tablets were!

Start by figuring out your after-tax earnings for your main job(s). If you’re salaried, this is easy. If you’re self-employed or a non-fixed shift worker, you’ll want to take an average of at least your last three months. Don’t count bonuses. These should be treated as extra if possible. Invest these bonuses wherever possible! Unless they make up a very large percentage of your monthly pay packet, of ocurse.

Next, it’s any benefits (e.g. Child Benefit) followed by dividends or rental income etc. Although, if you’re anything like I was a year ago, those things won’t even be on your radar.

Once you’ve listed all your income sources, sum them up. You can do this in tab 1 of my spreadsheet. Hopefully, this total looks like a nice chunk of cash! That is, until you minus the sum of your expenses. Which brings me to Step 2.

2 – Know your monthly living expenses.

You read that thinking ‘This is easy, I just add my rent/mortgage, household bills, what I think we spend on shopping… how much is our car insurance again?’ *checks statement*… ‘What’s this payment for Amzn*0024856 for £23.56!? And why are we still paying for the gym membership we haven’t used in a year-and-a-half!?’

Until you start looking into it, you have no idea how much your true outgoings are per month. It’s not good enough to have a ‘rough idea’. And if you don’t have a budget for things like groceries and eating/drinking out, then I can guarantee, you’re sinking way more cash into these categories than you might like to think!

With this in mind, I cannot emphasise this enough… Get a budgeting/money managing app! I use Yolt. It’s incredible! I hear YNAB is also good. Link all your accounts. And I mean ALL of them. Your current accounts, credit cards, savings accounts, e👏ve👏ry👏thing👏! It does all the hard work for you. And don’t worry, these apps are set up with bank level security and encryption so your data and info is safe and protected. All you need to do then is, monitor the payments that come through and categorise them appropriately, e.g. a payment comes through for that cheeky McDonald’s drive-through and logs itself as ‘groceries’ – I’d change this to the ‘Eating out’ category. Once you’ve categorised this transaction, it’ll unearth all your previous McDonalds transactions and ask if you’d like to re-categorise those too! Magic! You can’t change a bad habit if you don’t know you have one!

Run this for a few months so you can get used to the categories and functionality and before you know it, you’ll have a thorough, live feed of exactly what your monthly expenses are! So long as all your active accounts and cards are linked, this will be as accurate as you can get.

Each month, we look at our outgoings for each category and agree on where we’re spending more than we’d like so we can adjust our behaviour the following month. It’s really quite shocking how much we spend on takeaway food some months. But Yolt helps to keep us in line!

You can now write all your expenses out into tab 1 of my spreadsheet with as much or as little granularity as you like. Update this on a monthly basis, along with the rest of the tabs in my spreadsheet, if you’re using it, and you’ll get a monthly reading which you can use to update your ‘Expenses In Retirement’ tab as you approach this phase of your life. This will enable you to stay agile in the face of changes to living costs and ensure you don’t retire too early. Or worse, work longer than you have to! Erghh.

3 – Know your debt.

So, you now know your monthly expenses, and this probably includes some outgoings in the form of payments for loans, credit cards, mortgage etc. But what is the sum of all that debt?

You probably don’t want to know. I know I didn’t! But you’ll never be able to tackle it if you don’t know what you’re dealing with! Plus, you’ll need this for step 5. List them out, one-by-one, including what they’re for and how much is outstanding each month. This goes in tab 5 of my spreadsheet, although some of the info is auto populated from the Equit & Assets’ tab, so don’t overwrite this!

If you’re using Yolt or something similar, this should help you capture any forgotten loan payments and direct debits that might have evaded your periphery over the years. Again, sum all of these up in tab 5 and update on a monthly bases. In the spreadsheet, there’s a live, stacked graph showing our outstanding debt each month. It’s a nice visual, especially when it starts going down!

4 – Know your assets.

This is the total value of cash and everything you own and don’t owe money on. For example, your house. The portion you own – your equity – can be counted in this. So, say you have a £300,000 house and your outstanding mortgage amount is £220,000, this means you own £80,000 of your house and this would be counted in your assets. Some people include their cars in this calculation. However, I avoid this as cars are generally a depreciating asset that lose value over time. Whereas, a house, is generally an appreciating asset that gains value over time. Things I include:

  • Your house (Equity only)
  • Valuable goods e.g. Jewellery
  • Cash & cash equivalents (savings)
  • Investments
  • Other real estate

Then, if you really want to get into the nitty-gritty, you can include:

  • Inventory
  • Furniture
  • Equipment (electrical, mechanical etc)

You get the idea. Once you’ve listed your assets and their corresponding value, sum these up too. I update this figure on a monthly basis in my spreadsheet and it auto-fills a nice, stacked bar-chart for me so I can see my assets growing. Once you have this number, you can move to step 5.

5 – Know your net-worth.

You’ve done all the pre-work you need to calculate this. Basically, take your total assets and subtract your total debt that you calculated in step 3 for that same month. I set up a basic formula in my spreadsheet so that whenever I update my debt and asset tables each month, it spits out an updated net-worth with another nice graph in a separate tab. Just beware, if you’re anything like me and you’re in the early years of a mortgage and your career, you’ll likely have a very low, or negative net worth. Don’t let this panic you. Stick to your goals and savings and paying off your debts like I talk about in my previous posts and you’ll see your net-worth climbing month-over-month. Before you know it, you could be worth half or three quarters of a million quid! Seriously. Possibly more, if you save and invest wisely! Talking of goals, let’s dive into Step 6.

6 – Know your stash goal.

Your stash, as I mentioned in a couple of previous posts, is anything from step 2 – your monthly expenses – that will still be applicable in retirement. I took off my mortgage and all our consumer debt payments, as I plan for these to be fully paid-off before we reach retirement. I then added on extra for eating out and A LOT more for holidays and travel. Using my spreadsheet, or your own, figure out all these yearly expenses in retirement. Think about the retirement you want to have and try not to limit yourself. Again, make sure your partner is involved in this conversation too.

Your stash goal will also change depending on if you’ll be earning any money in retirement. For example, if you’re part-time consulting or blogging. Factor this in if you can, as it can make an enormous difference to your FI date (the date you can leave your main employment and do what you want). If not, go worst-case like I have and assume you’ll be getting nothing extra. This way, anything additional will be a nice bonus! It doesn’t have to be bang on perfect, you can adjust each year as you approach retirement so it’s accurate. Then, multiply this ‘total yearly expenses’ number by 25. So, say your expenses are £30,000/year x 25 = £750k. Your FI number is 750K. If there are two of you, it’s however you want to split it depending on your saving potential. I’ll leave you to decide that!

This FI number is your ‘perpetual money-making machine’. You can draw down 4% of this each year without ever running out. ‘How?!’ you ask. See step 7. Also, how and where you invest will result in different tax requirements. For example, if you invest now into an ISA you don’t have to worry, as you’ve already paid the tax from your salary and saved into your ISA whatever you had left. However, if you’re paying into a SIPP or, company pension, you get tax relief and can take 25% of what you save for retirement tax-free once you hit 55. Anything else though, will be taxed at the same rate as anyone’s equivalent salary at that time. For this reason, multiply your FI number by 1.25 to account for a rough estimation of your tax and national insurance payments, assuming you’ll be in the 20% bracket that is. My spreadsheet takes care of all of this and has a section where you can manually enter the estimated value of your savings once you reach your TRA (target retirement age). This can be easily calculated using an online, compound interest calculator, entering what you have now, what you pay in monthly and what your average yearly return is on your investments. If you sum these up and calculate 4% of this total, you’ll have your yearly income. Now you know how close, or far you are from your goal! My ‘retirement expenses’ tab in my spreadsheet works this all out for you. Now you need to know how to bridge that gap, if there is one…

7 – Create a plan to achieve it.

Once you know how much you need for retirement, you need to create a plan to get there. This will involve one or a few of a long list of strategies, hacks and techniques that have helped and continue to help many in the FI community achieve true financial independence and an early retirement. Firstly though, you’re going to need to save, and get good at it! See the post in my ‘Early Retirement Strategy’ series: ‘How to maximise your savings rate’ for a thorough overview of how to optimise your savings and get on the fast track to an early retirement.

The next part of your plan is making that money you’re saving work for you. So it grows exponentially in the time you have between now and your target retirement age. The single, most effective and powerful way of doing this is by investing. No, I’m not saying you need to become the next Wolf of Wall Street, or start gambling away your money in the casino that is day trading or buying call and put options. Unless that’s your thing, of course! But I wouldn’t recommend it! I’m talking about a ‘set-and-forget’ strategy of investing that has produced annualised returns for multiple, multiple decades of around 9%. It’s achieve by investing in low-cost index funds. These are the same type of funds that I spoke about in an earlier post, which your pension is likely invested in. However, you’ll need to open up a brokerage account with a provider who charges low or, no fee’s. I use Freetrade. Most in the FI community use Vanguard or Fidelity. The reason I use Freetrade, obviously, is because it’s free to make trades of any size at any time of day. The only charge is a £3/month fee for holding an ISA. They do have a free ‘basic’ account. However, the ISA means I can invest up to £20,000 each year and none of my gains or dividends are taxable!

There are other providers out there who have free ISA accounts, but Freetrade is extremely intuitive and easy to use, especially for beginners in the stock market. They also offer a long, ever-growing list of ETF’s (Exchange Traded Funds), which is another name for index funds. Just always, always, always check the ‘Costs and Charges’ document for these ETF’s. I tend to stick to a 0.5% ‘Ongoing charge’ and below. So long as it tracks a fund which I believe will continue, or, begin to grow over the coming years.

Also, as a side note, they have a referral offer where they will give both you and whoever you share the link with a free share, worth up to £200 if they sign up and top up their account with at east £1! Let me know in the comments below, or on twitter if you’d like my link and I’ll share it with you! It’s free money in my eyes. Then you can go on to recommend your friends and add to your portfolio for nothing!

I’ll have a monthly post where I disclose my investment portfolio to share with you guys where my money is invested and why, to help you make informed decisions about how to invest your cash.

“But isn’t the stock market risky?!”

That depends on your strategy. If you’re investing in individual, speculative stocks without looking at their balance sheets, reading their quarterly & yearly reports and truly understanding the business model of the company you’re researching, then yes. That is extremely risky. However, if you’re investing long-term (more than 5 years), in low-cost, diversified index funds with exposure to the global stock market, then no. Not entirely. Don’t get me wrong, there’s always some element of risk with the stock market, because it goes up and down all the time. But look at any 5-year period of any stock market exchange and you’ll see the same thing in most instances: they all go up over the long run. I’ll be covering this in a separate post, as I mentioned above, to give you much more detail and the breakdown of my personal approach. But ultimately, low-cost, broad-based (diversified) index funds have yielded an average annualised return of 9%. There isn’t a savings account in the U.K. right now, neither will there ever be, that will pay anywhere near 9% interest per year! Plus, savings accounts don’t pay dividends! Most index funds do! The great thing about this is, the money you earn from dividends can be re-invested to buy more of those same index funds, which continue to grow at an average of 9%, and now pay you more dividends because you own more shares of that fund. Your money will grow more money. Seriously.

So, how can you withdraw 4% of your FI stash in retirement and never run out? In simple terms, say your stash is £500K. This means your expenses in retirement were £20K per year. So, you withdraw 4% of your stash per year (£20K), leaving you with £480K still invested across your portfolio. As this £480K is still invested, it will continue to grow, most years, with the global markets it is exposed to. As discuss earlier, on average, this will be by around 9%. This turns your £480K into £523K by the end of that same year. So, the next year you take another £20K, leaving you £503K, which grows 9% to £548.5K… and so on. Get it? Magical isn’t it!

Now! Obviously, like I mentioned before, markets go up some years and down others. So you need to be flexible. But this flexibility goes both ways. If the markets consistently go up for 2-3 years by more than 9%, you can give yourself a pay-rise! Maybe set some aside or leave it invested for when you really need it. If they grow by less than 9% in a year, I personally wouldn’t worry. Just keep taking your 4%, as this will average out with the years the market outperforms that 9%. However, if the market has negative growth for 1 – 2 years, then you’ll need to give yourself a pay cut to be on the safe side. Therefore, it’s best to factor this in when you’re working out your stash goal! Just rest-assured that the 4% rule has worked out for people 95% of the time. Remaining agile in the rare instances that the market dips for a few years can give you a potential 100% success rate! In fact, in more than 90% of historical cases. The 4% rule meant people ended up with many, many times what they started out with when they first retired.

That covers the basics of investing and the 4% rule. Look out for my future post on my choice of investment platform and which funds I am invested in.

So, hopefully by this point, you now have an understanding of your current circumstances and at what age you’re currently set to retire at. Armed with the information above, you can now form the makings of a plan to bring that retirement forward by as many years as possible. You should start by following all the steps above. Build yourself a spreadsheet to capture everything, or download mine (I’ll link it at the bottom), and read my previous post about maximising your savings rate. Then, take action on the advice in these posts: pay off your debts, save more, spend less, earn more wherever possible, and invest the difference. Once you’ve got all of this in motion, you understand the value behind it, and you see the massive potential this information has, and the enormous, positive impact it can have on your life, then, in my opinion, you can consider yourself financially savvy, too!

Let me know in the comments below if you have any questions. Or, contact me on Twitter @FiSavvyDad. If you got value from this and don’t want to miss any future posts, then subscribe below to join the FSD notification squad to get new posts direct to your inbox!

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Path to FIRE Spreadsheet Template

You can purchase the template for the spreadsheet I use to track my finances and plan my early retirement here. Each tab has instructions on how to fill it out and guidance on what information to put where to receive a holistic view of your personal finances, your retirement plan and your progress towards achieving financial independence and an early retirement! Once you've processed your payment, you'll be emailed the spreadsheet direct to your inbox within 24 hours. So, make sure you enter the correct email address! Thank you!


Published by Finance&Lifestyle

A Dad from the UK documenting his journey to financial freedom. Sharing my lifestyle and finance hacks so more people can find financial independence, retire early and take back control of their future.

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