Your Ultimate Financial Plan in 10 minutes
Summary
TLDRIn 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
💼 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.
🏡 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.
🚗 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.
Mindmap
Keywords
💡Cash Flow
💡Margin
💡Opportunity Cost
💡Fundamental Costs
💡Purpose-Based Spending
💡Down Payment
💡Early Retirement
💡Investment Pot
💡Autosave
💡Trade-offs
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
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