Stepping Stones on the FS Path to FI: Make a Budget – in Local Currency

As Benjamin Franklin put it, “If you fail to plan, you are planning to fail.” Budgets are key to getting on the path to FI, whether you’re FS or not. As for why you should do all or part of your budget in the local currency, the short answer is that people are lazy at math when we really want something, so we often round down in our heads as to the true cost of things. Putting things you buy on the local economy in the local currency helps keep you on track.

Step One: Know Where You’re Starting From

Living an FS lifestyle is pretty grand, but it can get pretty pricy without warning. The first step to understanding how to get from point A to point FI is getting a better understanding of point A to begin with.

Before you start making budget buckets, track your spending for a week, or a month, to see where the money goes. Track Everything. The mortgage for the home in the U.S. if you have one, the Amazon shopping (I see you, Trailing Houses), the meals out, the groceries, etc. The really delicious cheese and the ‘I couldn’t help it they followed me home’ local handicrafts.

For some items, like consumables, you’ll need to ballpark your total spending and divide it over the length of your tour. Those packets of Kraft Mac & Cheese and Ghiradelli brownies didn’t come as part of your welcome kit! (If they did, I want your sponsor, please). If you buy your fuel from the Embassy rather than the local market, put that in there, too, averaging how many fuel tickets you go through per month, and how much that costs.

At the end of the period, take a look at what you’ve spent. Are you within the base salary? Are you within your base salary + COLA? Are there certain items that you are spending an exorbitant amount on? It’s ok if there are – at a post in West Africa I discovered that a quarter of my food spending would go to cheese if I wasn’t checking myself. The trick is knowing that you’re doing it, and reminding yourself, the next time you’re at the cheese counter and the chevre is calling you, that you have better uses for that money, or at least you could probably survive on a couple hundred grams, rather than the whole kilo. Probably.

Knowing where you currently spend will help with…

Step Two: Wrangle Yourself a Budget

Now that you’ve found where the money is going, we’re going to find a way to make it fit into our new lifestyle, and new goals. You’ll want to divvy up your spending into simple to track categories. Food, Car, Entertainment, etc. Personally, I use Mint.com, but there are a million apps and spreadsheets and ways to track your money. Do what works for you, but do it, and stick to it.

As I discuss in another post, for me, the best ceiling limit for your budget is your base salary, plus COLA if you need it. If you can’t get there yet, don’t worry, but that should be your goal. Look for areas to trim, and see if your purchases are things you do because you value what you’re purchasing, or just because it was there and you had the funds available. Part of the path to financial independence, for everyone, not just FSOs, is reducing unnecessary expenditures, which in turn reduces the amount of time and savings needed before you get to Financial Independence.

Make sure that you’re including space in your budget for your Individual Retirement Account (IRA) and your Thrift Savings Plan (TSP). Yes, you can contribute to an IRA in addition to the TSP. As of 2019, the annual contribution limit is $6,000 ($7,000 if you’re over 50) for the IRA and $19,000 (with catchup contributions of an additional $6,000 if you’re over 50). Monthly, that works out to $500 for the IRA and $1,583 for the TSP. This can seem steep, but you should be pulling the TSP funds out of your every pay check ($730.76 per pay period) so you don’t even see the money (and accidentally spend it). Yes, there are potentially better opportunities for the money once you’ve met the employer match, but that’s for another time.

Most people would stop here. You’ve tracked your spending, you’ve set yourself a budget that keeps you within your means. You’re all set. For FSOs, however, there’s one more step.

Step Three: Budget in Local Currency

Many of the items you’ve budgeted for are likely things that you buy on the local economy. Your fresh groceries, your cab fare, salaries for any hired helpers you may have (this is not a slight, I love having a housekeeper to make sure things run right and to be there when maintenance needs to fix something).

Identify those categories, and, at the beginning of every month, figure out what that budget bucket amount is in local currency. I use Xe.com, which has a handy app as well that you can install on your (personal) phone.

Why do we care what the local currency value is? Because, if you’re anything like me, you’re not interested in doing precise math on the fly. You say, oh, that carpet/picture/doll/jewelry/gadget is only 700 francs, there are 70 francs to a dollar, so that’s $10, which is precisely my budget. Which is great, until you realize that the currency when you pulled it out was actually 60 francs/$1, and now that item is $11.66, and with enough of those you’re over budget in every category. Knowing instead that you have 600 francs to spend that week on widgets helps keep you on track and within budget.

I hope this helps you, and please, if there are points of clarification or additional information that you’d like, reach out in the comments!