This topic is really dear to my heart and it is frustrating that although it affects every single one of us, none of us learn about it in school or even university.

We all pay bills, we all (hopefully) earn money, we all pay taxes (usually) but do we really know how all this works? How are we expected to win this game if we don’t know the rules?

Aiming for Financial Independence?

If you are looking to achieve financial independence where you don’t have to worry about unexpected expenses or even losing your job, you have to need a financial safety net. How do you create one? By saving money. The obvious way to save money is by maximizing the gap between what you earn and what you spend.

One option is to increase your income. That’s great but it usually comes with higher deductions from your paycheck and also can lead to lifestyle inflation. You used to live on 40,000 USD a year but now you earn 50,000 and adjusted your lifestyle. The result: still not more money to save.

Another option is to reduce your expenses. This might be more controllable than your income. “Just go and earn more!” is easier said than done. But reviewing your expenses and checking where you can cut cost is definitely doable.

Rule #1 – Track Your Expenses

Do you know how much you spend on eating out for lunch and dinner or how much you spend on shopping every year? These are usually areas where you probably spend more than you think and the best way to find out is by using an app, a spreadsheet or simply a notebook and recording your expenses for a certain period of time. Sounds cumbersome and it does take time to get used to but once you find a system that works for you, it will become second nature.

Rule#2 – Create a Budget

Knowing how much you spend on certain categories is great but that is basically just recording the past. It means you are reactive. But in order to get ahead, you need to become proactive and create a budget. Looking at this year, how much money do you expect to earn? How much money are you going to spend on certain categories? How much are you going to save this year?

Give yourself a budget and practice sticking to it. You can even start with one category and then gradually expand. You can get really creative with your budget but I recommend covering the basics

• Essentials
  • Rent
  • Utilities
  • Internet & Phone
  • Transportation/Gas for car
  • Insurance
  • Groceries
  • Healthcare
• Non-Essentials
  • Shopping
  • Eating Out
  • Recreation
  • Travel

Track for a while and figure out where you can start saving money. I am creating a budget and tracking my expenses now for almost 10 years and it has paid off big time. When I changed my job from a sales job to a non-sales job, I saw a surge in eating out because I don’t have any customer lunches anymore that are covered by the company. So I decided to cook at home and bring a lunch box (or ask my wife for help) and reduce the cost.

Rule #3 – Pay Yourself

This one ties into the budgeting piece but once you know how much you earn and how much you can live with as expenses, set yourself a savings target. Once your paycheck comes in and your credit card bills are paid, transfer as much as possible to a savings or investment account. Out of sight, out of mind. If you just use the money in your account thinking you’ll just save what’s left over at the end of the month, there won’t be anything left. But if you put money away at the beginning you’ll be surprised to see that you can actually live with less than you thought.

Rule #4 – Understand the rules of the game

After getting your expense tracking and budgeting set up, it’s time to understand your paycheck. Look closely at your paycheck and understand what all the deductions are for. Now, this is very different for everyone depending on the country or state you live in but it usually includes things such as

• income tax
• health insurance
• pension
• residence tax
• workers’ comp
• unemployment insurance

I encourage you to either ask your HR department to explain what all the deductions are or alternatively google, google, google. Once you are done, go ahead and figure out what kind of options you have to reduce your income.

I live in Japan and the basic options for me as a company employee are furusato nozei (ふるさと納税) where I donate money to a cities and municipalities and receive some goods in return as a “thank you”. Not only do I receive goods in return, it also reduced my residence tax for next year. Another way is iryohikojo (医療費控除) which allows me to declare all health care related expenses not only for myself but my whole household. This allows me to reduce my taxable income but the amount I spend over 100,000 JPY per year. Might not be much but it’s still worth it.

Before we go into any further detail, go ahead and follow rule 1 to 4. Give it a shot and let me know how it goes.