in this video I want to walk you through my step-by-step financial plan on how to use your money to live a happier life by the end of this video you'll know how to optimize your cash flow prioritize your spending towards your life goals and how to balance living in the present whilst planning for the future if you're new here I'm Nisha I'm a qualified accountant and a former investment banker and on this channel we talk all things personal finance and self-development let's start with step number one your personal cash flow this is essentially a measure
of your financial efficiency it's calculated by taking your total income and subtracting your fundamental costs so let's look at an example Alex who earns 5,700 a month from her salary and a side gig her fundamental costs include anything that is essential to her living so these include reoccurring expenses like rental mortgage utilities mobile phone transportation and groceries minimum debt payments and in total that should make up between 50 to 60% of your take-home pay once you have an accurate amount which reflects the total of your fundamental costs in any given month in Alex's case 2,900
a month subtract that number from your take home pay that is your margin so in this case Alex's margin is 2,800 per month so that's within the recommended guideline this margin is the amount that she can choose to save invest or spend on non-essential items understanding this margin is super super important it's what dictates exactly how much you can allocate towards your life goals whether it's saving for a house investing for an early retirement saving for a holiday or just enjoying life obviously there's a finite amount of money that you have available so whatever decision
you make will have an opportunity cost we'll talk more about that in step for the key is to regularly monitor your cash flow so you always know where your money is going and how much margin you have left each month step two is your purpose-based spending now that you understand your Purp cash flow and you know how much margin you have left over each month it's time to think about your current lifestyle and the life you want to be living 5 years 10 years from now this step is all about allocating your margin to your
purpose so let's bring up Alex again Alex starts by think about all the things that she wants to do and Achieve she wants to buy a home with a big Garden she wants to retire early she wants to quit her job to pursue her passion full time ultimately what she chooses to do with her margin will dictate each of these goals she can then turn into reality so now she needs to get super clear on how much each of these goals are going to cost her so first up she wants to buy a new home
and that's going to cost her approximately 500,000 that's a benchmark she's also expected to put down 20% as a down payment so she would need to have aimed to saved up at least 100,000 plus legal fees property tax and any other Associated cost with buying a home so let's assume in total she needs 120,000 she also as we said wants to quit her job within the next 2 years is to do something more fulfilling or even to start her own business to do that she knows she needs to build up a healthy cash buffer or
a cash pot set aside that lets her take that risk and that she can continue paying her bills from when she does take it she also said she wants to retire early she calculated how much she needs during retirement and it's 50,000 annually the 4% role it's a very high level role and it's used commonly in retirement planning suggesting that you can withdraw 4% of your savings annually adjusted for inflation to sustain your funds for at least 30 years so the way to work out how much you would need in Investments is you take your
annual number 50,000 in this case and times it by 25 this is a back of the envelope number that she would need in her investment pot to be able to retire early and that is 1.25 million so as you can see with step number two you want to think about your goals and put a financial number that you need to save or invest to be able to meet those goals in any given time frame and then step three is to organize your finances to reach those goals so now that she has a pretty good idea
of what she wants and what it would take to get there now she needs to organize her finances around her goals and essentially do a feasibility check so let's look at her first goal if she needs 120,000 saved up within the next 5 years because that's when she wants to buy her home given her monthly margin of 2,800 she can now calculate her feasibility so to save 120,000 in 5 years she needs to save 120,000 divided by 60 months 2,000 per month with a current margin of 2,800 per month Alice can comfortably allocate 2,000 towards
her down payment goal this leaves her with an additional 800 a month for spending holidays any other goals or expenses that she has outside of her fixed living expenses she should also set up autosave and put those savings into a high interest account to earn more on the money that she's saving making it easier to reach her Target potentially a little bit sooner you also want to think about other things that you need to do that relate to the financial goal so in this case you'll need to familiarize herself with mortgage options interest rates the
qualification criteria this includes understanding how her savings her credit score and her income impact her borrowing capacity so knowing this will help her plan how much she needs to earn and save to get the mortgage size that she's aiming for now if Alex separately wants to quit her job and transition into entrepreneurship or even maybe a lower paid job a more fulfilling career she needs to focus on building that cash buffer given her living expenses or fundamental costs which she already has calculated are 2,900 a month she would need to save up just under 35,000
which is the 2,900 time 12 over the next 2 years so if you break that down you need to save 1,458 a month to build up that cash buffer this is well within her monthly margin but not if she's also saving for her home at the same time and if she does choose to quit how would this impact her ability to get a mortgage that's something else that she would need to consider if she does want to consider both and then let's look at her third goal which is to retire early if she's 30 right
now and wants to retire by the time she's 50 then assuming an average rate of return of 8% she can start by putting in 2,300 a month into her Investments That Way by the time she's 50 she would have put in 552 th000 but her portfolio would be worth 1.25 5 million which is what she needs to be able to retire off if she wants to retire even sooner so in 15 years then she'll need to find a way to put an extra 1,000 a month in which is more than what her margin is at
the moment so she needs to find other ways to make this compounding work if she does want to retire early I'm not going to go into the details of this investing section asset allocation taxfree accounts that's another Topic in itself if you do want a video on that let me know but I also have a free cheat sheet which outlines what to do with your money on payday and in what order and covers everything from building an emergency fund repaying debt investing in which accounts to them prioritize completely free link is in the description by
going through this and understanding how you need to prioritize your finances to meet your goals I want to emphasize on two things firstly depending on what you want your life to look like in 2 years in 5 years in 10 years from now you need to do different things with that margin to make it happen with short-term goals you can focus on Purely saving and tucking that money away into a high interest or high your savings account but if your goals are more than 5 years away you want to look at investing it to make
that goal potentially happen even faster the second thing I want to talk about here is that you need to take your goal or your vision and to assess the feasibility you really need to break it down into what you need to do today to make that thing happen in the timeline or the time frame that you're looking for it to happen in although your circumstances will change you might get a new car in the middle you might get a pay rise in the middle you can always go back and adjust the those amounts or those
monthly savings or Investments to reflect your situation and the third thing that you actually need to consider is step four which is choose your trade-offs every single financial decision you make involves a concept called opportunity cost in simple terms opportunity cost is about what you give up when you choose one option over another it's like the Unseen cost of any decision like choosing to spend money on a holiday instead of putting it towards saving up for a deposit understanding opportunity cost helps you make better informed choices by not just considering the immediate benefit but also
what you might be missing out on so with small day-to-day purchases I try not to think of opportunity cost or sweat the details if that thing that I'm buying costs less than 0.01% of your net worth don't worry about the opportunity cost just enjoy the spending the two places where opportunity cost really comes in is for your home and for a car and for these you want to carefully weigh the immediate benefits against the long-term costs and how impact your broader life goals so firstly let's look at housing tradeoffs in Alex's case choosing a nicer
home if she decides to go for buying that more expensive Countryside home with a garden she's foregoing the prospect of retiring early or even being able to build a cash buffer for her to be able to quit in the time frame she wants and I want to really emphasize this here because it's virtually impossible to plan for everything at the same time so you're going to need to prioritize what is the most important thing for you at any given time so in my early 20s whilst I was putting in a percentage of my margin towards
investing in the stock market and letting that money compound I was far far far more focused on saving up for a home that was where most of my money was going once I then bought that home my focus shifted and my next big goal was to quit my job and pursue something that I wanted to do full-time so then it became building out a healthy cash buffer and that is where all my margin then was focused on and now in my 30s I double down on investing to build and focus on the freedom that I
want had I in fact chosen to rent a home for a bit instead of buying I might have been able to build the freedom part that I want sooner I could have saved on the larger deposit the fees associated with buying a home and that huge amount of savings could have been invested potentially growing faster than property values over the same period and in fact it has the amount that I put in towards the deposit for my home is worth less than had I put that same amount into the stock market but at the same
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same link you can also get 20% off of your annual premium subscription the second big tradeoff is a car so again I had a nicer car than I needed for many years but when my focus shifted and I wanted to desperately build out that cash buffer I sold my car I didn't actually need it and when I sold my car I put that money towards my emergency fund to Fast Track that cash buffer which ultimately led to me being able to quit my job sooner by focusing on those really big purchases that have a huge
opportunity cost and evaluating how these major purchases fit into your overall Financial strategy you can make sure that your decisions today support your goals for tomorrow always ask yourself when it comes to Big Ticket spending how will this affect my financial future and what am I giving up by choosing this now so this is how I looked at my finances how I used it to build or to craft a life that I want that genuinely makes me happy so I wanted to share that with you in case there's a financial goal that you have in
mind but you don't know how to apprach it I love to hear from you what are you focusing on at this point in time let me know in the comments I'm going to read every single one and if you like this video you might also enjoy this video that I have right here thank you and see you there
