Name: Your Ultimate Financial Plan in 10 minutes
Uploaded: 2024-08-03T15:11:24.000Z
Duration: 12 min 41 s
Description: Thousands of YouTube videos with English-Chinese subtitles! Now you can learn to understand native speakers, expand your vocabulary, and improve your pronunciation...

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.

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.

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.

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.

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.

Now that you understand your personal 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 five years, 10 years from now.

This step is all about allocating your margin to your purpose.

Alex starts by thinking about all the things that she wants to do and achieve.

She wants to buy a home with a big garden.

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.

She's also expected to put down 20% as a down payment.

So she'll need to have aimed to saved up at least 100,000 plus legal fees, property tax, and any other associated costs 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 two years 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 could continue paying her bills from when she does take it.

She calculated how much she needs during retirement and it's 50,000 annually.

The 4% rule is a very high level rule 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 will take to get there, now she needs to organize her finances around her goals and essentially do a feasibility check.

If she needs 120,000 saved up within the next five 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 five years, she needs to save 120,000 divided by 16 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 Alice 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 will need to save up just under 35,000, which is the 2,900 times 12 over the next two years.

So if you break that down, she'll 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 552,000, but her portfolio would be worth 1.25 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, tax-free accounts.

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, and which accounts to then prioritize.

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 two years, in five 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't focus on purely saving and tucking that money away into a high-interest or high-yield savings account.

But if your goals are more than five 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 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 talk about 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 it'll impact your broader life goals.

So firstly, let's look at housing trade-offs.

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.

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Your Ultimate Financial Plan in 10 minutes

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