How To Create A Financial Plan That Is Sustainable and Successful?
Do you ever look at your finances and worry about which direction you should go in? How best to make the most of your cash and what your next steps should be? Well, it might be prudent to make a plan for your finances. We spoke to Malia, Founder of Little Miss Finance to give us some tips on how best to create a successful 5-year financial plan, to ensure we can get in the best position possible with our money.
1. “I want to take my finances more seriously but I’m also feeling hopeless because of my debt situation – I have to pay off £35,000 in two years. I feel like I will be in debt forever. What should I do?”
Malia: The best place to start is to map out a plan. I know how daunting & stressful it is to feel like you will never escape debt, however that is a mindset that you can immediately squash by having a roadmap in front of you.
From: “Oh my gosh, I have so much debt, I am never going to be able to get out of debt, I’ll be paying this off forever!”
To: “If I can pay £1,000 on my debt for the next 27 months, I will be debt free on January 1st 2023”
Having a specific plan gives you a light at the end of the tunnel! It is something specific to work hard towards, instead of feeling helpless & like it will never go away!
Here is how I would go about breaking down this specific example.
- Goal is to pay £35,000 in 24 months
- = payment of £1,458 per month to reach this goal (setting aside interest for the moment)
- Is £1,458 feasible & realistic?
- We need to determine our monthly income
- We need to determine our monthly expenses (rent, utilities, groceries, entertainment, etc.)
- Does our monthly income – our monthly expenses leave enough left over to pay £1,458 on debt?
- If the answer is yes, great! Start to put this plan into action!
- If the answer is no, then we now need to consider how to make more money, typically this means a second job. OR extend our timeline to allow for a lower monthly debt payment, however I would highly recommend finding a second income to knock this debt out ASAP
- Choose a second job that is something is of interest to you, and that you don’t completely dread! Again, I know you are probably thinking I don’t want to work two jobs forever! Remember, it is not forever, you know exactly what you need to do to become debt free on the specific date you mapped out! This is temporary, and your hard work will pay off!
- Create a budget that outlines how you will organize & prioritize your spending to align with this debt repayment goal
2. “I wanted to buy house before my 30s and my father always advised me I need to create multiple revenue streams. So how can I earn passive income so that I can make money while I sleep?”
Malia: The most common way to earn passive income is to invest in the stock market. When you invest your money in stocks or bonds, you have the opportunity to earn interest income. The more you invest and the longer your timeline to invest, the more passive income you can earn. Another way to earn passive income is through real estate & house hacking (google that!). A third way to earn passive income is by starting a side hustle & creating a community who are interested in hearing your expertise on a certain topic. From there you can create an online course, a “how-to” guide or a write an e-book that you can sell! While these are all great options, I would recommend starting with investing.
3. “I’ve just graduated from university and found my first full-time job. Should I consider saving up for retirement? I mean, I still want to have fun!”
Malia: YES! YES a million times over! It is 100% possible to save for retirement AND have fun. You should always pay yourself first, meaning invest or contribute to savings before you spend your money elsewhere. If you can get into the habit of this when you begin your first “big kid job” then it will begin to come second nature & you won’t even notice that money coming out of your paycheck.. you won’t miss it at all!
As a recent university graduate you have one of the biggest advantages on your side, and that is TIME to save for retirement. The reason that time is a huge advantage is because of compound interest.
Check out this example from VertansUnited.
4. “Do I really have to set up an emergency fund? I have been saving a little money but not much…does it count as one? If not, how much should I really save?”
Malia: Yes, an emergency fund is a must-have for all individuals because unfortunately life happens and we all face emergencies that will impact us financially throughout life. This fund will allow us to cover those expenses without spiraling out of control and into debt!
Many individuals just have general savings, and don’t necessarily consider it an emergency fund. The truth is that your general savings can shift to be your emergency savings, it’s just the matter of calling it something different! It is important that you are not touching these savings for general expenses that NOT emergencies!
In order to determine how much you should save, you can determine this by looking at your monthly living expenses. For example, how much does it cost you to live for 1 month (rent, groceries, car payment, entertainment, etc.) You can determine this by pulling your bank or credit card statement for the prior month or months and calculating how much money you spend in 1 month. A typical emergency fund should by 3-6 months of living expenses (3 months if you have a very stable job / income and 6 months if you have more volatile or unsteady income). However these are just thresholds, you can ultimately decide how many months you want your emergency fund to be. For example if you determined it costs you £2,000 to live per month, you would need to save £6,000 to have a 3-month emergency fund, fully funded (£2k x 3 months =£6k).
As mentioned, it is incredible important that you are not tempted to use this emergency fund savings money for expenses that are not emergencies! If you have trouble holding yourself accountable & not touching that money, considering opening a savings account at a different bank than your everyday checking.
Do you like these tips on how to create a financial plan? Let us know below!