The first step to achieving financial independence or early retirement is managing the cashflow or in simple words understand your earnings and more importantly your expenses.
What is Cashflow?
In simple words, Cashflow is the money flowing in and out of your bank i.e. Money earned minus Money spent. As a FIRE (Financial Independence and /or Early Retirement) seeker, I would assume that you know the importance of saving money and to save you need to spend less than what you earn and bigger the difference better it is.
If you want to be successful in the FIRE journey, you need to understand your money flow such that you can start trimming the unwanted expenses and increase your savings rate. Don’t worry it is not hard to track your cash flow you can use tools like Mint, Personal Capital or plain old excel to track your income and expenses. I have been using Mint for the last several years and it helps me stay on top of my finances. I am going to add some real data from my own cash flows in the year 2018 that I tracked using Mint.
You can choose whichever method you like to track your cash flow but remember it is super important to not only understand your cash flow but having near real-time visibility into how your money is flowing.
Why is it important for Financial Independence?
It is essential to understand your cash inflows and outflows and understanding if your inflows are bigger than outflows or not. If they are not, you can never be financially free rather you would be heading towards a death spiral of debt.
Once you get a hang of your cashflows the next important step would be to start looking at your inflows (income) and outflows (expenses) and asking yourself two important questions:
How can I increase my income?
You want to increase your income as fast as you can and seek out ways to setup passive income streams. The more money you make the more you can save. More savings i.e. Money invested will lead to Financial Independence.
How can I reduce my expenses?
Making more money alone is not enough for early retirement as you need to get your expenses under control. Remember, the less money you spend less you need to save for retirement. Start tracking your expenses with Personal Capital
Trying to answer these questions will give you multiple ideas which you should prioritize. While generating more inflow (especially passive income) is a vital step to Financial Freedom but as a first step, I would recommend focusing on outflows and striking out all the extra waste – anything unessential needs to go.
What Next in Early Retirement Journey?
So you have done the first 2 steps and now you have removed all the extra unessential spending out of your cashflows. Now you need to create a plan to keep these extra spendings out of your cashflows forever and how to increase your income especially passive income. This is hard and will require a lot of determination, hard work, and a strict plan.
Following this plan will set you up on the right path to financial freedom. In our next post, we’ll discuss now that you have reduced your outflows and have some extra cash what can you do with it.
Until next time.! Keep your criticism and feedback coming via the comments.
Image Credit: Fidelity.com