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Buying financial freedom

Buying financial freedom

Once a month I do a lap around my bank and brokerage accounts, manually downloading transaction statements and populating my desktop based personal finance software.

20+ years of experience helping clients to implement evidence-based decision making has taught me that a person’s ability to lie to themselves is boundless. Therefore I don’t place much value on budgeting, as without diligent execution a budget is an empty promise of hopes and dreams on the road to disappointment.

“a budget is an empty promise of hopes and dreams on the road to disappointment”

I do find keeping score of what actually happened is instructive.  This allows analysis of the facts. Credit card statements don’t lie.

My setup is simple.


Outflows fall into one of five categories:

  • Needs
  • Housing
  • Investment Expenses
  • Tax
  • Wants
Snob Hill or Struggle Town

Snob Hill or Struggle Town? Housing size, location and price is a choice. Image credit: Namirob and pix027.

Needs covers the essentials, like groceries. Regardless of whether you reside on Snob Hill or in Struggle Town, there isn’t a huge variance in the cost of needs within a given locale.

Housing has its own category because for many people (me included) housing is their second biggest outflow after tax. Having a safe, warm, dry place to sleep at night is definitely a need… yet the location, size, and the price that we pay for that home is a discretionary choice.

Investment Expenses are those costs incurred while generating the income streams I did not need to be physically present to earn.

Tax is a, largely discretionary, expense that should be managed like any other. It is also the biggest outflow for many people. If it isn’t then you either need to invest more in yourself because you aren’t earning what you could be… or you deserve credit for managing your finances effectively.

Wants covers everything else: gifts, furnishings, holidays, mobile phone bills, eating out, and charitable donations.


Inflows are split into two categories:

  • Income that requires my physical presence to earn


  • Income that does not.

Passive and active income are myths

Being a generally disagreeable fellow, I take issue with both the terms active and passive income.

There are times when investment properties can feel anything but passive, during maintenance issues or when refinancing for example.

Conversely, I have some clients who feel reassured enough by my presence that they pay me a retainer, even though they seldom call upon it.

Keeping score

Providing your combined inflows exceed your combined outflows then any combination can be considered winning.

If that isn’t the case for you then you are doing it wrong!

My definition of financial freedom is when the inflows not requiring my physical presence reliably covered the outflows. I comfortably passed this milestone before my 40th birthday.

What does “normal” look like?

I was curious what a “normal” expense split looked like. Which in turn led me to wonder what a “normal” income split would look like.

If I don’t know something I’m a big fan of asking somebody who does, so I asked the Office of National Statistics. They pointed out “normal” is subjectively based on perspective, but they could tell me what the “average” person did.

They had a fair point. Everyone thinks of themselves as being above average, yet enough people take out payday loans and watch reality television to make both compelling business models.

An “average” person does…

The first chart breaks down the weekly outgoings of the average London household.

Weekly household expenditure by category - London 2017

Weekly household expenditure by category – London 2017

It is alarming how little people save, particularly given the climate of low interest rates, low inflation, and full employment.

The second chart aggregates that spending into my five categories.

Weekly household expenditure by category grouping - London 2017

Weekly household expenditure by category grouping – London 2017

Housing and tax collectively account for almost half of gross earnings. Wants consumes nearly a third.

The third chart plots average UK inflows against average London outflows. Unfortunately, the ONS didn’t ask the right questions to allow the income side of things to be broken down by region.

Weekly household UK income and London expenditure by category - 2017

Weekly household UK income and London expenditure by category – 2017

The good news is the average person earns marginally more than they spend.

The bad news is that the curse of averages makes the inflow figures a bit of a nonsense. How many wage earners do you know who also earn self-employment income, private pension income, and government benefits?

Buying financial freedom

I found it helpful and motivating to set out my own expenditures in this manner.

It allowed me to plot business, dividend, interest and rental income alongside my household expenditures.

As those income streams grew I could chart my progress by doing the victory dance each time those income streams sustainably covered off another expenditure category.

It was a good feeling knowing I never again needed to worry about how I would pay the gas bill, or where the grocery money would come from.

In time all my bills were covered.

Eventually all my wants were similarly funded, buying financial freedom.

After that any additional earnings were icing on the cake… and there aren’t too many problems that can’t be solved with cake.

Next Steps

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