In order to achieve financial independence, you need to first understand what your annual expenses are. That’s how much money you need to live comfortably every year.
Your annual expenses can include things like housing, transportation, food, utility bills, entertainment, travel and the many other things that make your life … well, your life!
For our family, I’ve found that number to range between $60,000 and $70,000 per year. That number is after taxes and it doesn’t include money for saving and investing.
With lower annual expenses, it would definitely be a lot easier for our family to become financially independent.
If we're using the 4% rule to calculate how much to save to become FI, then we’d need $1,500,000 – $1,750,000. Considering I have around $4,000 in a taxable brokerage account at 37 years old, that’s going to take quite a while!
But a few years ago, I started interviewing people on my podcast about their financial independence plans and successes.
I’ve chatted with some couples that happily live on around $30,000 – $40,000 per year. With annual expenses like that, you could hit FI at $750,000 – $1,000,000. That’s a lot more feasible when you factor compound interest into the equation.
As I continued these interviews, I got inspired to lower our family’s annual expenses. With lower expenses, our family would be able to hit FI much sooner!
I was also conscious of not whittling down our expenses so much that we wouldn’t have fun together during the early part of my marriage and our kid's lives.
So … how can we decrease our annual expenses while increasing the fun in our lives?
Well … here’s what our family did over the last 4 years to make this a reality.
Decreasing Our Expenses
1. Pay off the Mortgage
When we bought our home in 2013, my wife and I agreed that we’d pay off our mortgage in less than 5 years. This would allow us to own our dream home in our ideal neighborhood with a great school district … and live there mortgage-free.
This 4-year mortgage freedom process helped us to reduce our annual expenses by $14,000 per year.
2. Save Money on Groceries
In 2014, we were shopping at Kroger for our regular grocery needs. It’s a great store with an awesome selection, but it’s a little pricey.
After chatting with some frugal shoppers, I learned about Aldi. My wife was hesitant at first because of the following reasons:
- The store was 15 minutes further from our house
- You had to bring your own bags
- There weren’t very many brand name items
- And you had to bring a quarter to get your own shopping cart (you get it back at the end, but nevertheless … it was different!)
She decided to go anyway (because she sometimes indulges my craziness) and to her surprise, she started to REALLY like it.
Fewer choices meant a quicker shopping experience and the “bring your own bags” thing filled up her environmentally conscious heart.
My frugal experiment worked too. We saved around $3,000 by making the switch to Aldi. And the stars aligned for my awesome wife as well! A brand new Aldi opened just minutes from our house last year.
3. Crush the Monthly Bills
My next victims were our monthly bills. These included:
- Cell phone
To save on our cell phone bill, it was a quick and easy process really. Nicole and I were on separate cell phone plans. By combining into a “family plan”, we saved around $400 per year.
For the electric bill, I’m going to attribute our overall annual savings to our Nest Thermostat.
Now, I don’t have ANY actual proof whatsoever, but that’s the only major difference we’ve made in our electrical spending. My favorite feature is the “ECO” mode. It essentially turns your AC unit off while you’re away from the house automatically.
Our overall savings for electric between 2014 and 2018 was around $600.
Lastly, we cut the cord on cable. Simple as that. Bye-bye Comcast and hello $600 of annual savings.
Increasing Our Fun
1. Vacation More
In 2014, we didn’t travel very much. We had a newborn baby and went down to 1 full-time income instead of 2 so Nicole could become a Stay-at-Home Mom and take care of our two kids.
Now that our kids are older, we want to vacation more. Last year was our first test run at more travel and more fun. We increased our travel spending by $5,000!
We went to Cabo San Lucas (well, that was on points), Northern Michigan, Los Angeles (points again) and Cancun. It was an incredible year of vacation fun.
2. Give More to Charity
Something that brings a smile to our face is giving away our money. There are causes and charities that our family is passionate about.
Here are a few of them that I've had the pleasure to interview on my show:
- Together We Rise (and here's the interview)
- Thorn (and here's the interview)
- Sandy Hook Promise (the interview is coming out shortly)
When you have money to give, it feels incredible to be generous. In 2018, we set a goal of giving 3% of our income to charity. We were happy to achieve that goal and teach our kids the importance of giving as well.
Overall in 2018, we gave around $3,000 more than we did in 2014. This spending makes us happy and others as well.
3. Schedule Activities for our Kids
We love our kids to freakin’ pieces and we want them to have happy, healthy and fun childhoods. With that desire, comes some investment.
Last year, we signed our kids up for summer camps, swimming lessons, the soccer team and, of course, pre-school. This increase was around $2,000 more than what we spent in 2014. And we’d do it all over again.
All of our Expenses
When you combine our annual expenses that decreased and the ones that increased, we see a net savings of around $7,500. Not bad!
Here’s the full chart that shows more categories of increases and decreases over the period of 2014 to 2018:
Now, will $63,548 of annual expenses make it easier for our family's financial independence plan? Probably not by much, but it doesn’t hurt our chances either!
According to the 4% rule, that’s about $187,000 less we’ll need to save up to hit FI. That’s right! A $7,500 difference in annual spending can dramatically affect the savings required to become financially independent.
What I’ve learned by analyzing our spending differences over the past 4 years is that, as long as we’re increasing our happiness and decreasing our spending on the “unimportant stuff,” we’re headed in the right direction.
And really, I’m already feeling pretty financially independent without actually being financially independent.
What do you think of financial independence?
Is it motivating you to decrease your annual expenses?
Please let us know in the comments below.
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Carpe Diem Quote
“Being rich is having money; being wealthy is having time.” — Margaret Bonanno