Last Updated on August 13, 2020 by Early retired mom
So here comes the second part of my journey to financial freedom.
You see, living my life on a wheel consumes a lot of my time and energy and I really had enough with this life – the corporate life I mean.
A life where you chase from title to title, from a salary raise to another salary raise and from trying to be productive on account on my time with my family.
I really just want to escape the rat race life, save money, live better and enjoy the simple thing life has to offer me.
In the previous post, I have discussed the reasons which led me to this journey. Or in other words, what is my motivation for doing all this hard work. This is an important step to figure out with yourself, if you want to retire early.
The second part, which is this post, is the planning phase. That means in this article you’ll learn how to set up a monthly budget.
I have divided this process into steps that are very easy to follow.
The journey to escape the rat race life must include financial planning, or a household family budget planning as it is a key step in figuring out how and what needs to happen next year, in very specific level of details.
So here it comes.
How to set up a monthly budget and saving target in 4 simple steps
To create a budget, you can of course start putting numbers into Excel by month and try to stick to it. But doing only this is just creating a household family budget out of context.
So I would like to divide the planning part into a few sub steps. Some of them you may be able to complete, and some may be a bit f guess work.
Step 1 – What was my family spending in the last 12 months?
Since the last time I wrote the blog I’ve done a lot of investigation into my family spending in 2019.
I looked at all the transactions I had in 2019 and all my credit cards and bank accounts and did a big Excel by month of all my expenses by category.
Here are just a few of my categories:
- Car fuel
- Home insurance
- Buying apparel
- Medical bills
- Kindergarten / babysitter
- Newspaper (I have digital subscription)
- And so on
I can up with 52 categories for monthly spending. If you want me to share with you my full category list or my Excel file, just visit this link.
Now, some of you may not be able to complete it.
However, I was able to easily complete this task as for the past few years I am using an app that tracks all my bank and credit cards transactions.
Big tip from me, as each country has its own personal financial planning app – make sure you get one and start using it today.
Step 2 – Build an annual household family budget
I then looked and saw what my average monthly expense was and of course what was the annual amount and based on that I built the budget for 2020 by month.
The planning must include the monthly saving target. That is the first thing that needs to be taken off the salary.
This is the oxygen in this life called Financial Independence.
The plan is to save money, so I need to be able to lower my expense in some of those categories. So, I went through category by category looking for where I can save. This is how I plan to escape the rat race life.
Here are just a few examples:
- The first example that popped up was my health and life insurance cost. It was a very high amount. So, the first thing I did is looked into all the different insurances and figured out how much each of them costs. That was the first thing I did because I didn’t have a clue about how much I pay and for what. Which was of course unfortunate and very irresponsible of me. Then I called my insurance agent to get an offer to reduce those costs. Guess what, I just saved $100. Yeah!
- Next thing I pay for is an automatic lottery participation. Canceled – $35 saving!
- Reduce the amount we spend on food, dippers and other baby expenses by 30% as it is currently very high. That means I need to look into what I actually buy to understand what I don’t need any more or what I can buy at a cheaper price or in bulk. This alone would account for substantial amount of money – $250 alone. However, as I have only put it in the household budget, I do not yet count it as saving as this is something that I need to watch dynamically and do not go over budget. So, I look at it as an optional money saving for now.
- Car expenses – Today we have two cars – one is a big SUV that contains three car seats, a twin stroller, bikes and everything else 3 small kids need when we go out of the house. The second one is a cheap small car. Both of those cars have insurances which cost us a lot of money, but they also have a big fuel expense. One way to reduce the amount is for me to use the big car to take the kids to the kindergarten and back and my husband to drive the cheap car to work which consumes more fuel. This way we use the big car only for short drives or when we’re going out on the weekend. This would also reduce the insurance cost because now we are using the car much less.
Those are just some examples of how I can save money and you can look into your account in your bill and see how you can save money what is it that you can do on a daily basis to save dollars here and there.
Step 3 – Set a saving target
Currently, we are in the middle of the month, and I am under budget for $650. Most of my transactions are in credit cards $785and my payment date is on the 15/1 and today is the 16 of January.
So, I know that if I use my credit card again it will be charged next month, meaning Feb 15th. So, if I can save that amount ($650) next month and add my previous spending cuts (with the insurance and the lottery), I’m already able to save $785.
And I am just getting started. Meaning, I just investigated 2 categories out of the big list of 52 categories.
Some categories like city payments, kindergarten and taxes cannot be changed.
Let’s say that I can find an extra $225 in savings – that will lead me to $1,000 a month.
These days we are in the middle of the home construction that has exceeded the budget. The story is that we are renovating an old house (my husband’s mom home as she moved out) that needed a lot of things to be redone from scratch, like electricity and plumbing.
So, we are taking a loan for the first time, other than the regular car and home loans. At least for us.
I do not like.
It delays our escape from the rat race life we are in at the moment.
However, there are some things in life which are unavoidable.
The good part is that our assets value will increase substantially.
It means we’ll have more money in the bank if we decide to sell it move to a smaller place once our kids grow.
Generally, I am against loans and always try to live with what I have at hand but the in the past 3 years, we have had an unexpected expense, that consumed most of our savings. You can almost say we start from scratch.
As a person who hates loans, first I need to do it plan how to get out of them. Right now, I pay the most amount of interest on my mortgage. The interest amount that I will pay in the next 25 years amounts for a very big amount.
So, I want to have a savings target to cover loans but also to still have cash to invest. Stocks have been my primary investing tool in the last 1.5 years.
This year, I want to be able to pay off 1/4 of that home loan. That’s including the amount that I pay monthly.
However, my plan is to put aside every extra money I get like tax refunds, bonus from work and other unexpected income towards my stock account.
If you’re asking yourself why I did not set a saving fix target as of now, and I am just trying to see dynamically month by month how much I can save?
As we are in the middle of our home renovation, we have unknown expenses in the next few months.
So, to be realistic I know that the next 2 months are going to be a financial nightmare.
But starting March, I plan to set aside 10% of our monthly income towards a saving account. Then investigate my options to increase it to 15%, so I can reach the goal of covering my home renovation loan faster.
Step 4 – Review it daily and make amendments if needed
I believe financial planning is a critical step to understand where the opportunities are to save more money.
Moreover, my focus changes and financial planning is now taking a bigger focus then it was before. Getting out of the rat race has always been my goal at least in the past 10 years. I got sidetracked for a few years but now I am back in full steam.
So, if before I used to review my spending every 1-3 months. Now, I plan to look at it daily. I started to think of my family as a business.
Meaning I should run it with care, watch the money flow and develop opportunities to expend my profit / revenue. Also, updating my spending daily allows me to dynamically decide where I need to cut cost in a certain month. So, I can increase or to fulfill my saving target.
So, this 2nd step, which is about financial planning, is where we actually save money.
It means, I need to look every money transaction and understand our expense patterns as well as understand what is it that I can do every single month to save additional money.
Here’s a great article that provides a
So, here is a summary for my plan to escape the rat race life:
- The 1st step was to understand why I do it, why I am willing to put all this effort.
- The 2nd step is all about how to set up a monthly budget bused on previous year spending, and decrease the average monthly amount spent in the different categories by:
- Identifying which spending can be reduced due to services that we do not need, changes of habits and so on…
- Set a monthly saving target that will help you reach this year’s goal
Hope you enjoyed,
Early retired mom