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by elmads

Introduction 

Money management has been a widely discussed topic, people either do not like it or love it, either they learn and master it or just never cared to even acknowledge it. There are different reasons for these opposing views, which can be all connected to what we either have learned from our parents, teachers, relatives, friends and/or what we have experienced in our lives. Yet, despite our various views about finance and money, it is still deemed an undeniable important part of our humanity. It has always been a component of how we live in this world just like what Zig Ziglar quoted.

“Money isn’t the most important thing in life, but it’s reasonably close to oxygen on the ‘gotta have it’ scale”.

-ZIG ZIGLAR

Everything that we do is connected not to money itself but on how we utilize our money to attain what we want and need. This is where financing comes into place. Take for example, when the COVID19 pandemic struck and the lockdown in your country started, what did you do to your money? I am sure you planned where your expenses should be going by prioritizing the most basic matters of your life for both yourself and your family’s survival. Your money did not tell you to do that, it was you who decided what to do with it by knowing what you deem essential. Each and one of us has been handling money in different methods, either we are aware, unaware, right or wrong, knowledgeable or not, we have been definitely practicing it. Therefore, I ask you this question, why not just take the financial reins of your life and carve your own financial path?

Financial planning will vary in each person because it is a process of creating, managing and enhancing our wealth based on our life goals and needs. In money management we will need to review our current financial health, the future financial status we want to achieve and what we can do to attain our objectives. This process takes time and requires a lot of effort from us, consider it as our own life project. This blog will guide you to the step-by-step process of a Do-It-Yourself financial planning in the simplest and most understandable form.

WEALTH PROTECTION

The 1st and 2nd steps are part of Wealth Protection, which the backbone of our financial wealth journey. It is essential to attain both steps in order to, as much as possible, reduce the risk of money mismanagement once problems occur. We certainly would not want to tap on our investments or go into debt when such financial difficulties arise in our lives. 

1. Securing our Cash Flow  

Our parents always tell us to study hard, finish high school, then go to a university and get a degree, afterwards find a job and attain a good salary from it. Almost all parents say that, probably around 99.99% of parents have said those statements to their children more than once in their lifetime. This garnered both positive and negative opinions about this narrative from the public.

Nonetheless, there is one undeniable fact about this, which is this process gives a regular salary per month based on our degree and qualifications, regardless if it is a large or small sum of money.

Finding a steady source of income is the first step to secure our cash flow and this will always give us the stability in our independent lives. There are ways to securing cash flow other than acquiring employment and that alternative is starting a small business. Both methods have their merits and demerits, but both processes will still need a monumental amount of our time and effort. Once our cash flow has been established we move forward to the next step

We need to make sure that we do not spend more than what we earn. It is simple as this, if our salary is 1,500 GBP per month, then certainly we should not spend 2,000 GBP in a month. It sounds easy to follow isn’t it? but hey! a lot of people do this kind of spending. That is why we hear stories from others or even 1st hand stories from our friends themselves. That they are broke and do not have any money to survive for the next couple of days or weeks before their pay day arrives. Yet, when we see how their lifestyle is, it is as if they have a large amount of salary to support it, a never-ending cash flow of money kind of life. We’ll be just saying to ourselves, No wonder! This is why tracking the what, when, where and how we spend and save our money are integral skills in personal finance.

“Do not save what is left after spending, but spend what is left after saving”

-Warren buffet

Thirdly, never go into debt as in never. The government and the banking sector encourage people to utilize loans, for us to have a better leverage in our lives, to use debt as a quick way to acquire and pay for items and services, and to use it for emergency purposes. All of these statements are true, the problem here is not the debt but the person obtaining the debt. Let me explain this further.

Most people do not know how to handle debt. It is, for most individuals as the number one culprit that causes havoc in their financial life. The longer we have debt and do not know how to manage it, the more we will sink into financial ruin. It is literally just like a time bomb that the longer we are holding it, the higher the chances that it will blow up in our face. Acquiring debt is not a basic part of financial planning, it never is and will never be part of our financial fortress. If you are not yet stable in your financial life and not knowledgeable in accumulating wealth, as much as possible, please do not dabble with debt.

Lastly, it is my favourite delayed gratification. I have explained this clearly in my blog titled “Why should we save and invest our hard-earned money”. Just to give you a quick summary, delayed gratification in personal finance is a discipline of getting a little bit of our money today to make it into a large amount of money tomorrow. Most savers and investors have delayed gratification within themselves, they learned how powerful this mindset could be when applied, not only in finance but also into other aspects of their lives.

Deferred gratification also shows us how important it is for us to achieve our financial goals in the future. It asks the question, is our drive to attain our vision of our own future, greater than our immediate temptation to achieve a short-term reward? If the answer is yes, and we do it consistently, then our future self and family will be forever grateful and joyful on the decisions we make today. 

The subcategories in securing our cash flow are the most important initial steps for us to move up the financial ladder. It is not how large or small our salary is, it is how we handle our resources, our income. It is our behaviour, then our action, on how we handle our resources that will dictate our own financial future.

Moreover, if we plan to start a business and we keep on complaining that we do not have the capital. Then we must be patient in securing our money, save and live as if we are broke as hell, until we get the capital needed (DEBT IS NOT IN THE EQUATION). Everything is about mindset and perspective, remember that hard work, habits and patience will bring us to success, not the jackpot and miracles that most people have been praying to happen.

2. Risk Management  

This is where we mitigate the possible future risks that may happen in our life. The ones that could ruin our finances if we are not prepared for it such as, critical illnesses, disabilities, economic recessions that could impact our employment or business. These are unpredictable events in life that certainly happens not so often, but still does. By saving an ample personal amount of money for this, could yield a substantial difference between; a complete financial disaster or financial protection to ourselves and our family.  

In addition, most widely used strategy to manage our risk is to save money for emergency fund, rainy day fund, life insurance and medical insurance, which all serves as a buffer for financial disaster level events in our financial lives. Namely, accidents, maintenance/repair expenses, death coverage and mild to serious diseases and illnesses. I have discussed each category in detail on my blog titled “Saving money for Safety and Security”, in which I cited what is it for, the importance and how to save money for it. 

2.5 Goal Setting

Before introducing and discussing about investing, I would like to ask my dear readers what are your financial life goals? do not tell me an exact amount of money, tell me what do you want to achieve, then this is where we will base the amount of money needed for it.

Subsequently, when do you want it to be attained? your timeframe, is it after a year, or after 3 years? 5 years or maybe after a decade? Write everything down in a piece of paper or, just on the notes of your phone. It is very important to ask these questions to ourselves, because this will be the rudimentary pillars of our investing strategies and principles.

• What are the Financial Goals in our Life? – The common financial goals for every individual are for retirement, education, capital to start a business, a home and a car. There are a lot of financial goals and it is different for each and every person, it is also dependent on our age and where we are currently in our lives.
  
  For instance, older people would have their own homes and cars already, while younger individuals do not have it yet. So, find the “what” and “why” in ourselves because saving and investing our money without knowing why we are doing it will just make us feel lost and unfulfilled even if we are a successful investor. I will share an analogy about the importance of goals in our life, which I’ve taken from Simon Sinek, a British-American author and motivational speaker .

“Imagine you are standing in a big empty room; you are standing in one corner. I gave you a simple instruction, I want you to go to that specific opposite corner on a straight line, which you did. Then without telling you I just flipped a chair in front of you and your path, what will you do? your normal reaction will just go around the chair and walk towards that opposite corner, but you just disobeyed what I instructed you to do which is go to that opposite corner on a straight line.

This is the amazing thing about human beings, when we have our own destination, we use our creativity and innovation to overcome obstacles just to get to our end goal. In other terms, the destination is more important than the root.

RESET!! you are standing again in the same room and in the same corner, I instructed you to go somewhere in this room in a straight line. You will be baffled and ask, go where? my answer is I do not know, your smart, figure it out and just go on a straight line. So, you pick a point and start walking, without telling you I flipped a chair in front of you and your path. what will you do? Usually you will just come into a grinding halt. I ask why did you stop? you answered, well you placed a chair in front of me. Or another reaction can be that, you will make a sudden turn and go into another direction either right, left or go backwards. Both examples are set in the same place and has the same obstacle, but with different outcomes because the 1st sample has a clear destination whereas the last sample does not have one, that is why some people without a goal in their mind even with high intelligence and skills still lost their way.” Always find you reason and meaning in your life.  

-Simon Sinek

• How much money will we need for us to attain it? – in this part, we need to know the specific amount of money that we will need to pay for the goods and services we want to purchase in the future, based on our financial goals. This is easy to find out today, thanks to the internet. We can search everything through online. For instance, if we are aiming for our education let’s say a master’s degree or a short online course, we could find those in the specific university webpage where we would like to go into, the same goes with purchasing a car and a home. When it comes to retirement planning, this will take a lot of time and computation, because we need to know what kind of lifestyle we want to live when we reach retirement age, how much will be our monthly to yearly expenses, where will we retire and how long do we expect to live our lives, starting from our retirement age that we choose. 
• Part 1 – The Inflation Adjusted Retirement Calculator ; Part 2 – The Inflation Adjusted Retirement Calculator ; Retirement Planning for Millennials & Gen Zs ; Retirement Planning – The Rule of 300
• When do we want to achieve it? – This is the number of months or years from today to the future of us purchasing or obtaining our specific goal. I implore to you, always be realistic with your time horizon, realistic in a way that you need to support it with your income stream. To illustrate, let’s say we want to buy a car worth 30,000 GBP while our income in a month is 1,500 GBP, our goal is to have this specific car after 2 years of saving and investing money. Let’s say we are a hyperaccumulator of wealth, which saves 30%-50% of our income, I’ll place it for 50% which is 750 GBP of the 1,500GBP monthly income. 750 x 24 months (to make it two years) = 18,000 GBP. This means that it is impossible for us to attain that car after 2 years because we only have 18,000 GBP and certainly it is impossible for us to save the whole 1,500 GBP salary because we have other expenses to pay and other budgeting pots to save. I even computed it at a 20% annual compounded rate by investing for 2 years with an initial deposit of 750 GBP, that income will just reach around 22,000 GBP. Therefore, it is still short from the 30,000 GBP car price. This is just an example to show you that our time horizon should be supported by how we save and invest money based on our income stream. Some of you might be thinking to just borrow money to achieve that extra money needed or just borrow the whole 30,000 GBP. I tell you right now, if you do not know how to manage money, have not established your wealth protection and do not have the right mindset about your finances, as much as possible please do not dabble with debt.

Once we have established these “what”, “why” “how” and “when” of our life goals, it is now time to go forth and multiply our wealth.  

Link to “Part 2 of the Step by step, Do-It-Yourself Basic Financial Planning”

Knowledge is my Sword and Patience is my Shield,

Evan Louise Madriñan / elmads

This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.