The Ultimate Guide To Creating A Budget For Financial Independence

It’s embarrassing to admit this, but there was a time when I was really bad with money.

Despite having a pretty decent start with managing my money early on in my working life, I did sink into a period of mis-management, where I played the role of Spendthrift Money Slave a little too well.

Basically, I was spending just about everything I earned every single month for a good two to three years.

I still cringe whenever I think about all the money I’d worked my butt off for that could’ve been invested if I hadn’t spent it on clothes, shoes, makeup, bags and loads of other nonsense that I eventually threw out during a painful whirlwind of Marie Kondo-ing all my worldly possessions several years later.

Moral of my painful story: If you think you need something because you’re shopping for your ideal, future self (ie how you want to look at a future date versus now), to impress other people or simply because something looks gorgeous and you think you can’t live without it, you probably don’t, and yes you can live without it.

So just like that, I fired Ms Spendthrift Money Slave and re-hired Ms Master Of My Own Money to take charge of my finances.

At this point, my only saving graces were the RM1,000 I’d been dollar-cost-averaging into unit trust funds (yes, outrageous fees but let’s save that convo for another day) monthly no matter what, and not getting into credit card debt because of my out-of-control spending habits.

To turn things around, I had to do three things:

1. Fix my broken money mindset. Somewhere along the way, I’d stupidly decided that shopping would be a fun hobby and lost sight of what was important to me (security and freedom). Another big lesson I learnt from Ms Spendthrift Money Slave is that just because I can afford to buy something doesn’t mean I should.
2. Know my numbers and set limits on my spending. Yes, it was time to re-instate the budget. But first, I had to know where my money was coming from and going every month.
3. Do both 1 and 2 consistently. Because I didn’t work in an ultra high-paying industry like tech or finance, going off the rails (again) was not an option if I wanted to be financially independent. Period.

Here are the steps I took to achieve all three.

STEP #1: I tracked my income.

To figure out how much I could reasonably spend and still have a good amount of cash left-over to save and invest, I had to know how much moolah I was bringing in every month.

This meant not only paying attention to how much pre- and post-tax income I was bringing in from my day job, night job (no, it’s not what you think. Tsk tsk. I basically spent my days in publishing and nights at advertising agencies) and other freelance gigs, but also passive income that my investments were generating.

It took me an entire year of tracking to come up with a clear picture of how much I was making and from where.

Income-Tracking Tip: This sounds like a pain to do, but actually isn’t. Just file away all your salary slips, invoices (if you do freelance work), investment dividend or interest payment statements and any other proof of payment from all your sources of income in one place (digital or physical), then spend a day or so adding everything up after the year is done to save time. If you prefer to do this once a month, go for it.

STEP #2: I tracked my spending.

This step by far was the most labour-intensive aspect of the whole budget setting process, but so worth it.

It’s basically what it sounds like: Recording literally everything you spend money on (down to every sen), every day of the year. I started out writing everything down in a ledger-like book (yup, I really did) but later transitioned to a budget tracking app on my phone. I currently use an app called Spendee, which makes the tracking process a lot quicker and easier to do.

If you’re tempted to skip this part, I urge you: Don’t.

It’ll help you uncover specific money habits — good and bad — that you may have as well as trends that have an impact on your spending. This could be mindless shopping, lifestyle creep, inflation or even spending triggers that get you to whip out your wallet even when you shouldn’t be.

Yes, it’ll start off feeling like a pain to do, and yes, it’ll take getting used to, but having this big spending picture in place is important because it’s only when you understand what you’re doing with your money that you can figure out where to save or spend more.

More importantly, it’ll give you an idea of how much you’ll need to stash away to reach FIRE.

How long should you do this for? I’d say the bare minimum that’ll give you a decent picture of your spending habits is 3 consecutive months, but being the geek that I am, I went for 12 months to start with. Well, I’m actually still doing it now because….habit.

Spending-Tracking Tip: Record an expense as soon as it happens so you don’t leave it for later and forget altogether. With time (give it 30 to 90 days), it’ll become a habit that you’ll barely have to think about. Be sure to record EVERYTHING, even the smallest spend and one-time, annual expenses.

STEP #3: I calculated my net worth.

The thing with FIRE is that you won’t know how far you have to go if you don’t know where your starting point is, and that’s where a budget comes in super handy.

This is where you tally up your assets (everything of significant value that you own, like your cash, EPF, stocks, property, unit trust funds etc), minus your liabilities (what you owe, like the remainder of any loans you may have).

Once you have your number, regardless of whether you’re in positive or negative territory, this is your starting point.

Net Worth-Tracking Tip: Start tracking your net worth as early as you can (something I regret not doing). You can chart this data later for a visual indication of how you’re doing year on year for extra motivation.

STEP #4: I (finally) set a big-picture financial goal.

Now that I look back, I can see very clearly that there was a big flaw in the earliest iteration of my financial goal(s): I didn’t really have any.

Yes, I knew that saving and investing were important for my future self. Yes, I knew that I needed to have a significant amount of money stashed away if I wanted to retire or live a work-optional life comfortably. And yes, I knew that I had to be a consistent saver and investor to make it all happen.

What I didn’t have was a number-driven goal, and I didn’t see the importance of having one until over a decade later into my working life.

In many ways, I’m very sure I went off-track with my spending habits because I didn’t have a big-picture goal or number to stay laser-focused on.

Financial Goal-Setting Tip: What’s your FIRE net worth number? This will help you figure out how much you’ll need to have socked away and generating returns, how much you’ll need to make and how long you’ll need to work for to reach it. Alternatively, you can try using a retirement calculator like this one to estimate how long you’ll need to work for until you reach financial independence (the sweet, sweet situation where you’re generating enough investment income to pay for your expenses and more) based on your current annual income, expenses, savings, savings rate and portfolio value .

STEP #5: I sorted out what ‘needs’ and ‘wants’ meant to me.

This one sounds easy in theory, but a lot harder to pull off in practice, especially since all of us have different ideas of what needs versus wants are.

I consider a ‘need’ as something I can’t live and thrive without.

For me, these are the obvious basics like money, food, a peaceful home, sleep, clothing, shoes and electricity, but also family and friendship. Once these are taken care of, I’d then extend the qualifying ‘needs’ criteria to other elements that support these basic essentials, like books, creative pursuits, learning and social events.

Less of a priority for me are ‘wants’, which are basically things I don’t care for or even live without: A luxury car, constant stream of new clothes, shoes and bags, a new phone every year, etc.

In contrast, someone who loves fashion or works in the industry will feel differently and spend accordingly. You get the idea.

Once I had these sorted out, prioritizing what to spend my money on became so much easier.

Needs-And-Wants Prioritization Tip: Write down your ‘needs’ and ‘wants’ so you have them in black and white. The more clarity you about what’s important to you and what’s not, the more you can take the guesswork out of setting your budget and minimize being taken by surprise by unplanned expenses.

STEP #6: I experimented with different budgets.

Setting and living with a budget isn’t something that you do once and forget about forever. Personally, it’s a living, breathing entity that changes with me as my life circumstances and priorities shift.

And no, it’s not meant to feel like restriction or punishment either.

Rather, I think of it as more of a comfortable spending number that lets me focus on living in the present and enjoying my life, but still being able to stash a significant amount of money to my FIRE goals.

To find my budget sweet spot, I experimented with two different types of budgets: One tight and one generous so I could get a feel for what both felt like. This let me find a middle ground that felt comfortable.

My take on this experiment? Experiencing both are important because if you’re too tight with your spending, it means you’re focusing too much on your future, which will likely leave you feeling unhappy, deprived and resentful (which I did feel with The Scrooge Budget).

On the other hand, focusing too much on having too much fun now (like Ms Spendthrift Money Slave did) will leave you feeling out of control with your money and behind in your FIRE progress.

Either way, you’ll be more likely to give up.

Budget Experimentation Tip: Give both The Scrooge and Generous Budgets a 30-90 day run. This way, you’ll have enough experience and data to work with before deciding where you can spend less and more on, and then settle on a comfortable middle-ground that’s right for your goals and lifestyle. Remember that a budget doesn’t have to be set in stone: It’s meant to be a plan that evolves as you grow.

STEP #7: I learned about minimalism.

This one isn’t directly budget-related, but I feel that it does in many ways influence how my spending shapes up.

For me, minimalism, particularly in the financial sense isn’t about demonizing spending, living like a monk or owning as little as you can — it’s more about figuring out what Ramit Sethi, the author of I Will Teach You To Be Rich calls our Money Dials, which are the areas in life where we love to spend money on, and why.

As a result of spending more on these areas because they’re important to us, we naturally tend to minimize spending or even spend nothing at all on others.

For example, looking at my spending habits over the last year, it’s very obvious that my top Money Dials are:

1. Health and wellness. Taking care of my physical and mental health is important to me, so I have zero qualms about spending heavily in this area.
2. Food. I love to eat, I love to cook and I love sharing a good meal with the people I care about, so this is something I consider a ‘need’.
3. Learning. If I never had to work for money, I’d just spend my entire life learning. Now that I’ve achieved some level of financial independence, it’s something I’ll be doing even more.
4. Gifts. I prefer to make gifts for people simply because it feels more personal, but when I know that someone will like and will appreciate a particular item, I don’t mind splurging on it for them (within reason, of course).
5. Fitness (post-pandemic). I’m working out at home for now because of the pandemic, but I love working out in groups and once the situation allows, I plan to be getting back to it.
6. Travel (post-pandemic). I’d like to spend a year or so being a bit of a nomad to see what it’s like, and can’t wait to hit the road once the pandemic is under control.
7. Experiences (post-pandemic). Salsa dancing, woodworking, volunteering at an elephant sanctuary, walking through the ruins of Pompeii — there’s so much to see and do, so this is a Money Dial I’d happily turn way up to experience them.

Financial Minimalism Tip: Write down your top 5-10 Money Dials. What do you love to spend money on that makes you feel like every bit of it was worth it? As a fun contrast, write down things that other people seem to prioritize spending on, but you couldn’t care less about. How will your findings in this exercise affect your budget?

My current budget is the result of several years’ worth of trial-and-error and data I’ve collected from consistent tracking over the same period of time.

This data’s also given me insights into my biggest money dials and allowed me to design a budget that cater to them.

What about you: What’s your favourite budgeting tip for financial independence?

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Feature image: Joshua Rawson-Harris on Unsplash