Your Ultimate Financial Plan in 10 minutes

Summary

In this video, Nisha, a qualified accountant and former investment banker, guides viewers through a comprehensive financial plan to enhance happiness. She emphasizes understanding personal cash flow, prioritizing spending towards life goals, and balancing present living with future planning. Nisha uses Alex's example to illustrate how to calculate financial margins, allocate funds towards goals like buying a home or early retirement, and assess feasibility. She also discusses opportunity costs associated with significant purchases like homes and cars, advocating for strategic financial decisions to align with long-term objectives.

Takeaways

• 💼 Understand your personal cash flow by calculating your total income and subtracting fundamental costs to determine your financial efficiency.
• 🏡 Allocate a portion of your income (50-60%) to cover essential living expenses such as rent, utilities, and groceries.
• 💰 Calculate your financial margin by subtracting your fundamental costs from your take-home pay to see how much you can allocate towards life goals.
• 🎯 Set clear financial goals such as buying a home, early retirement, or building a cash buffer for career transitions.
• 📊 Use the 4% rule in retirement planning to estimate how much you need to save or invest to sustain your desired annual withdrawal.
• 🚀 Organize your finances by setting up autosave and directing savings into high-interest accounts to reach your goals faster.
• 🏛 Familiarize yourself with financial products like mortgages and understand how your savings, credit score, and income impact your borrowing capacity.
• 🔍 Assess the feasibility of your financial goals by calculating the required monthly savings and adjusting your spending and investment plans accordingly.
• 🏎 Consider the opportunity cost of major purchases like homes and cars, and how they align with your long-term financial strategy.
• 🌟 Prioritize your financial goals and make trade-offs by focusing on what is most important for you at different life stages.

Q & A

What is the definition of personal cash flow as described in the video?

Personal cash flow is a measure of financial efficiency calculated by taking your total income and subtracting your fundamental costs, which include essential living expenses.

What are fundamental costs according to the video?

Fundamental costs include reoccurring expenses like rental, mortgage, utilities, mobile phone, transportation, groceries, and minimum debt payments.

How much of one's take-home pay should fundamental costs ideally make up?

Fundamental costs should ideally make up between 50 to 60% of one's take-home pay.

What is the significance of understanding one's margin as explained in the video?

Understanding one's margin is crucial as it dictates how much can be allocated towards life goals such as saving for a house, investing for early retirement, or enjoying life.

What is the purpose of step two in the financial plan discussed in the video?

Step two focuses on purpose-based spending, which involves allocating the margin to one's life goals and understanding the financial implications of achieving them.

How much does Alex want to save for a new home according to the video?

Alex wants to save approximately $500,000 for a new home, with a goal of having at least $120,000 for the down payment, legal fees, property tax, and other associated costs.

What is the 4% rule mentioned in the video regarding retirement planning?

The 4% rule is a commonly used guideline in retirement planning suggesting that one can withdraw 4% of their savings annually, adjusted for inflation, to sustain their funds for at least 30 years.

How much does Alex need to save monthly to reach her goal of early retirement according to the video?

To retire early, Alex needs to save $2,300 per month, which would result in a portfolio worth $1.25 million by the time she is 50.

What is the concept of opportunity cost as it relates to financial decisions mentioned in the video?

Opportunity cost refers to what you give up when choosing one option over another. It's the unseen cost of any decision and helps in making informed choices by considering both immediate benefits and potential sacrifices.

How does the video suggest one should approach big-ticket purchases like a home or a car?

The video suggests that one should carefully weigh the immediate benefits against the long-term costs and how these fit into their overall financial strategy. It emphasizes the importance of considering opportunity costs associated with such purchases.

What is the role of trade-offs in financial planning as discussed in the video?

Trade-offs are an essential part of financial planning where one must prioritize what is most important at any given time, understanding that it's virtually impossible to plan for everything at once.

Outlines

00:00

💼 Personal Cash Flow Management

The video begins with an introduction to personal finance management, emphasizing the importance of understanding one's cash flow. The speaker, Nisha, a qualified accountant and former investment banker, outlines a step-by-step financial plan to optimize cash flow and spending towards life goals. She introduces the concept of personal cash flow, which is calculated by subtracting fundamental costs from total income. Using Alex as an example, Nisha demonstrates how to calculate the margin, which is the amount available for saving, investing, or spending on non-essentials. The margin is crucial for allocating funds towards life goals such as buying a house, early retirement, or enjoying life. Nisha stresses the importance of regularly monitoring cash flow to manage financial efficiency.

05:02

🏡 Purpose-Based Spending and Goal Setting

In the second part of the video, Nisha discusses purpose-based spending, which involves allocating the calculated margin towards specific life goals. She uses Alex's aspirations, such as buying a home, early retirement, and pursuing a passion, to illustrate how to assign a financial value to each goal. Nisha explains the process of organizing finances to achieve these goals, including feasibility checks and setting up autosave into high-interest accounts. She also touches on the importance of understanding the impact of major financial decisions, like choosing between a home and a car, on one's ability to meet broader life goals. The speaker encourages viewers to consider opportunity costs when making financial decisions and to regularly reassess and adjust their financial plans to align with their current and future goals.

10:02

🚗 Evaluating Trade-offs and Financial Strategy

The final part of the video focuses on the concept of opportunity cost in financial decision-making. Nisha uses Alex's potential choices between a more expensive home and early retirement to highlight the trade-offs involved in major financial decisions. She emphasizes the importance of prioritizing goals and understanding how different choices can impact one's financial future. Nisha shares her personal experiences with investments and the decision to sell her car to build a cash buffer, which ultimately led to her being able to quit her job sooner. She encourages viewers to evaluate the long-term implications of big-ticket purchases and to align their spending with their overall financial strategy. The video concludes with a call to action for viewers to reflect on their current financial goals and to engage with the content by leaving comments or asking for further guidance on specific topics.

Keywords

💡Cash Flow

Cash flow refers to the movement of money into and out of a business or individual's bank account. In the context of the video, it is a measure of financial efficiency, calculated by subtracting fundamental costs from total income. It's crucial for understanding how much money is available for saving, investing, or discretionary spending. For example, Alex's cash flow is calculated by subtracting her fundamental costs of 2,900 from her monthly income, leaving her with a margin of 2,800 per month.

💡Margin

In the video, margin is the amount of money left over after subtracting fundamental costs from one's take-home pay. It represents the discretionary income that can be allocated towards saving, investing, or spending on non-essential items. Alex's margin is 2,800 per month, which is the amount she can use to work towards her financial goals, such as buying a home or early retirement.

💡Opportunity Cost

Opportunity cost is the potential benefit an individual, investor, or business misses out on when choosing one alternative over another. It's the unseen cost of a decision. In the video, the concept is used to illustrate the trade-offs involved in financial decisions, such as choosing between spending on a holiday or saving for a house deposit. Understanding opportunity cost helps in making informed financial choices.

💡Fundamental Costs

Fundamental costs are the basic expenses necessary for living, such as rent, utilities, and groceries. In the video, these costs are essential to calculate one's cash flow and margin. Alex's fundamental costs total 2,900 per month, which includes her recurring expenses and minimum debt payments.

💡Purpose-Based Spending

Purpose-based spending is the allocation of one's margin towards achieving specific life goals. The video emphasizes the importance of understanding one's financial margin and then strategically using it to save or invest in ways that align with personal objectives, such as buying a home or early retirement.

💡Down Payment

A down payment is the initial amount of money paid toward the purchase of a house or other property. In the video, Alex plans to save for a down payment of 120,000 to buy a home. This is a significant part of her financial planning, as it sets the stage for her future homeownership.

💡Early Retirement

Early retirement is the act of leaving the workforce before the traditional retirement age, often to enjoy more leisure time or pursue other interests. In the video, Alex's goal of early retirement is used to illustrate the need for substantial savings and investment, calculated using the 4% rule, to sustain her desired annual withdrawal during retirement.

💡Investment Pot

An investment pot refers to the total amount of money one has in their investments, which is intended to grow over time and provide financial security. In the video, Alex calculates that she needs an investment pot of 1.25 million to retire early, based on the 4% rule for retirement planning.

💡Autosave

Autosave is a feature that automatically transfers a set amount of money from one's bank account to a savings or investment account. The video suggests setting up an autosave for Alex's down payment goal, to ensure regular contributions and to take advantage of compound interest.

💡Trade-offs

Trade-offs involve making a choice between two or more alternatives, each with its own set of benefits and drawbacks. In the video, Alex's financial planning involves making trade-offs, such as deciding between buying a more expensive home or saving for early retirement. These decisions require evaluating the opportunity cost of each option.

Highlights

Introduction to a step-by-step financial plan for a happier life.

Understanding personal cash flow as a measure of financial efficiency.

Calculating fundamental costs including reoccurring expenses and minimum debt payments.

Determining the margin for savings, investments, or non-essential spending.

Importance of regularly monitoring cash flow for financial planning.

Purpose-based spending and allocating margin towards life goals.

Example of Alex's financial planning for buying a home and early retirement.

Breaking down financial goals into actionable savings and investment targets.

Organizing finances to reach goals with a feasibility check.

Calculating feasibility for saving a down payment for a home.

Setting up autosave and utilizing high-interest accounts for savings.

Considering the impact of lifestyle choices on financial goals like buying a home.

Assessing the feasibility of quitting a job to pursue a passion or entrepreneurship.

Retirement planning using the 4% rule and calculating investment needs.

Importance of adjusting financial plans based on changing life circumstances.

Understanding opportunity cost in financial decision-making.

Evaluating trade-offs between major purchases like a home or car and long-term financial goals.

Practical advice on prioritizing financial goals and making informed trade-offs.

Encouragement to focus on financial goals that align with personal happiness.

Transcripts

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 time that was important

for me at that point in my life and

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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