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Seeing the Financial Wood from the Money Trees

The journey to financial independence can seem like a never ending uphill struggle sometimes. If you’re not careful investment fatigue can hamper you motivation and stifle your progress.

However while it’s very sexy to talk about and focus on investments, the real problem most FI seekers face financially is expenses. After all it is the expenses that need to be paid at the end of every month.

Expenses should be the primary focus of anyone seeking financial independence.

Early on in my journey towards FI I found that my expenses just seemed so vast a thing that I couldn’t envisage a time when they could be covered by just investment income. As a household we are relatively high earners but also (as is usually the case) high spenders. There used to be about 7 different bank accounts being used to pay, direct debit, standing order, withdraw and generally relieve us of our hard earned cash.

Progress only really came when I simplified our accounts and started tracking and categorising our spending.

How I Track Expenses

I’ve mentioned it before on the blog but lets recap on how I track our household expenditure. 99% of our expenses these days go through 2 accounts:

1. An American Express Card (that pays 1% cash back on all purchases). This is used for all shopping where possible and paid off in full each month.

2. A Santander 123 account (that pays cash back on most utility bills and decent interest paid on the balance). This account is used for all direct debits/standing orders.

At the end of every month I download the transactions from both of these accounts and dump them into a spreadsheet. I filter out all of the internal transfers and then categorise all of the outgoings into around 10-15 types (e.g. groceries, health, travel, insurance etc). This process is made very quick by using vlookups in excel to categorise regular or reoccurring payments (e.g. direct debits, petrol, supermarkets etc).

Once this is done it becomes immediately clear where you money is going each month. While this is great to know and just by measuring this stuff you’ll almost certainly stop spending so much it doesn’t necessarily show you what is required to help you read financial independence.

The next step is to group the categories into one of four sections:

  • Mortgages (including over payments)
  • Savings & Investments
  • Work related expenses (commuting costs, work related clothing etc)
  • Ongoing expenses (pretty much everything else)

Now we’re getting somewhere. Now we can see what proportion of our income is going where, and for what purpose.

Before we embarked on our mission to live off the Money Tree the big thing that struck me when I looked at our monthly cashflow was that there was a huge amount of cash flow through our multiple accounts that I couldn’t make sense of. We’ve never been too wasteful, have always saved and invested but the complexity of it all didn prevented me from seeing what was really happening. However when I consider what will be required once FI is achieved the picture becomes a bit clearer:

  • Mortgages
  • Savings & Investments
  • Work related 
  • Ongoing (pretty much everything else)

Once FI is achieved the majority of the outgoings we currently have won’t be needed. But what is in that ongoing category? Well it’s things like utilities, car maintenance, food, socialising, holidays etc.

Since moving out of London we eat out far less than we used to and when we do, it is far cheaper. Our days of multiple exotic long haul holidays a year are over, we’re now much happier visiting remote parts of the UK and spending our time hiking or cycling rather than lying on a beach. We still don’t feel the need for a chelsea tractor and likely never will. We like home made, healthy low cost eating and don’t have too many expensive habits.

Can't See the wood from the trees?

So what I see now in our monthly expenses spreadsheet is almost like an epiphany. If I strip out mortgage payments, over payments, savings, investments, and commuting expenses there’s not actually a huge amount left. Of course this…

If I strip out mortgage payments

is a little easier to say than do.

Murdering the Mortgage

By far the biggest slice of our household expenditure goes on the mortgage. Ignoring my rental properties (which are self sufficient/standalone from a financial perspective) a large chunk of our household expenditure is on mortgage payments, both regular and overpayments. For the last few years we’ve been in this low interest rate environment we’ve been overpaying our mortgage heavily.

When we started to overpay, we took the decision to leave our monthly payments the same no matter how many overpayments we make. So every month we automatically overpay more than last month, without really noticing. Rather than having cheaper repayments we’ve been reducing the remaining term of our mortgage. This has turned out to be a great decision.

In 2010 our minimum monthly mortgage payment was a shade under £1,000. Thanks to our manic overpaying, the current minimum monthly repayment is a more reasonable £337, a whopping £633 lower. So now if the sh$t hit the fan and we both got fired from work (before we get to fire ourselves of course) and our supermarket shelf stacking jobs couldn’t cover that £337, we could even convert our mortgage to an interest only schedule (on the same term) and only have to pay £150 per month.

In other words we’ve deleveraged ourselves massively and built in a huge safety of margin with regard to our home ownership. Of course I could have gone about things differently and pumped all of our overpayments into investments if I thought I could have gotten returns greater than the mortgage interest rate (which with hindsight I obviously could have). However those investments would have been taxed1 which would have had a big impact on the profits they returned. What’s more the ‘return’ I get from every overpayment is 100% guaranteed, risk free.

In Conclusion

If you’re heading towards financial independence then you should try to truly focus on just those costs that will be encountered in your post FI life. Once you’re in the promised land you won’t need to invest, pay down or save so much each month. By calculating what your ‘ongoing expenses’ will be post FI, you’ll probably realise that you won’t need anywhere near as much income as you do now.

In almost all cases you won’t need to replace your existing income entirely because your expenses will dramatically fall once you reach your goal. For us the answer has become clearer over time as our spending pattern has changed – kill the mortgage associated costs and we kill most of our expenses. Do that and we’re almost FI.


1My ISAs are for long term income production not short term storage of capital destined to be paid to the mortgage company.

{ 13 comments… add one }
  • Marco December 11, 2014, 8:33 pm

    Hi UTMT,

    I would highly recommend you download the free app Billguard. It is compatible with Santander and American Express and tracks all your purchases and sorts them into categories for you.

    No more spreadsheets required!

    • Under The Money Tree December 12, 2014, 9:12 am

      Hi Marco,
      Thanks for the tip regarding Billguard, I’ll definitely take a look. That said I always tend to prefer excel as it allows me complete control over how the data is organised, presented, secured and of course backed up!

  • Andrew December 11, 2014, 9:38 pm

    Good post, thanks. Would you be able to say more please about how you use VLOOKUP functions to categorise expenditure items? Or better yet, share a working model so that the formula can be seen in action. Many thanks, Andrew

    • Under The Money Tree December 12, 2014, 9:14 am

      I’m glad you enjoyed the post. I’ll try and post an example sheet over the weekend sometime.

  • BeatTheSeasons December 12, 2014, 10:25 pm

    This is a really interesting article, I’d never thought about dividing the four types of expenses up like that, although minimum spending after FI does feature in my plans. I’ve noticed in this festive season that the list of work related expenses is expanding to include the cost of Christmas meals, even today a Christmas jumper and related charity donation!

    Btw, how do you know the minimum mortgage payment? Does your lender tell you somewhere or have you worked it out in a spreadsheet?

    • Under The Money Tree December 15, 2014, 11:06 am

      For each of my mortgages I have a spreadsheet where I log every payment and over payment as and when I make them. As a result I can work out how much overpayments will save me over time, track my progress (which helps massively with motivation) over time and generally stay on top of them. Given us ‘investors’ take so much care to track our investments it seems only logical to me to use the same level of diligence concerning our debts.

      Work expenses soon add up. I have a long commute (rail) which is very expensive. Factor in suits/clothing, professional fees, work socialising etc and as you say the costs creep up to a sizeable amount very easily.

  • Cerridwen December 13, 2014, 9:47 am

    Hi UTMT,

    As someone who is older than you and further through the process I can only echo what you say about working out what you will need in retirement/financial independence based on a timeline of expenses/income . In this way you can see what you will need at each point of time and not be blinded by what you need now. The mortgage is an obvious example, but things like BTL, pension and dividend incomes will change as time goes on, as does tax liability, so “forward thinking” is essential.

    You have one big advantage on me though – you started planning/investing far earlier than I did (I didn’t really start to think about things until our mortgage was paid off, although we did overpay too) so you will get there very much sooner. Good luck to you

    • Under The Money Tree December 15, 2014, 11:01 am

      Thanks for the wise words. I always enjoy your posts that relate to your final push towards FI and the financial shuffling that brings on. While forward planning is essential it is also hard to plan to precisely for events so far in the future, for example I won’t be able to access my private pension for another 19 years.
      Can I ask how long it will have taken from killing your mortgage to reaching FI?

  • Jonathan December 13, 2014, 4:33 pm

    Your mortgage payments consist of two parts, as you mention towards the end of the article: “So now if the sh$t hit the fan and we both got fired from work … we could even convert our mortgage to an interest only schedule (on the same term) and only have to pay £150 per month.”

    The interest part of your repayments is without doubt expense.

    The capital part of your repayments properly belongs under savings, since it’s reducing your indebtedness.

    • Under The Money Tree December 15, 2014, 10:56 am

      You’re correct of course that I should currently view overpayments as ‘savings/investments’ and in a way I do. However our current plan is to be completely mortgage free by the time we go FI so we won’t have to worry about the distinction!

  • Mr Zombie December 15, 2014, 3:45 pm


    Only recently has it hit me how important tracking expenses are, so this article hits home with me.

    How long does it take you to analyse your monthly costs? I suppose if you don’t have too many categories it can’t take too long.

    Good work on overpaying the mortgage. I have a staff mortgage and get a pretty cheap rate so I am better off investing it, even cash gets me a better yield that the interest I would pay. I do wonder if this is the wrong strategy though. When rates do rise will I really pay off a chunk with my investments? That’s the plan but who knows.

    Mr Z

    • Under The Money Tree December 15, 2014, 5:36 pm

      Mr Z,
      It take me no more than 15 minutes to analyse my spending. I download 2 spreadsheets from my bank accounts, cut and paste the data in my expenses sheet, copy some formula down, add and categorise any new items and I’m done.

      It sounds like you have a very good mortgage deal. It’s always a tricky one as even ignoring all of the tax effects and returns calculations I always struggle with the selling of investments to clear debt (unless the financial benefit is obvious). When the decision is not clear cut I tend to take a balanced approach and do both in equal measure. As stated above I like the fact that paying down a mortgage has a risk free return.

      • Mr Zombie December 15, 2014, 8:09 pm

        Thanks for the reply.

        15 minutes is pretty swift!

        The more I think about it, the more your balanced approach makes sense for me also. Time to do some spreadsheet work I think 🙂

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