Updated: October 12, 2020
When you reach that point in your life where you realize the need to be in control of your finances, how do you start and make the change?
For most people, it’s as simple as spending less and growing their savings. For others, getting out of debt becomes the focus. While for some, this means finally learning how to invest.
If you’re just starting and still trying to overcome the hurdles of money management, then this post is your concrete, no-nonsense, two-year, financial plan.
Below are the goals that you need to achieve, preferably in exact order, before you can move towards more sophisticated financial goals.
Follow these concrete steps, and I guarantee that you’ll be financially ahead of your peers within two years or less.
Month 1: Study your cashflow
Your first step is to know how much you are earning and spending in a month.
This is all about tracking your expenses, and discovering how much money do you actually receive after all the taxes and deductions.
Remember that cash flow is, and will always be, the foundation of all financial plans.
Starting Month 2 onwards: Create a budget
Based on what you computed last month, create a budget for the succeeding month.
What we hope to achieve here is to ensure that you are not spending more than what you are earning.
From here forward, make it a habit to study your cashflow, adjust your budget, and live within your means every single month.
Starting Month 3 onwards: Pay yourself first
It’s now time to work on building your savings. As always, the easiest way to do this is to pay yourself first; that is to immediately take away a portion of your income as savings, and spending only what’s left after.
A good start is to save 10% of your income, which means if you receive P20,000 every payday, then you should promptly set aside P2,000 each time for your savings. But work your way up to the recommended 30% savings rate.
Starting Month 4 onwards: Build a plan to settle your debts
If you have credit card debts, personal loans, and other short-term debts, then this is when you’ll focus on how to eliminate them. The most effective way, which I’ve personally used, is the Debt Snowball Method – learn it and apply it to your finances.
Furthermore, while it’s tempting to pay off your debts using the cash that you’re paying yourself first, I discourage it because you need a cash buffer just in case a financial emergency happens during this time.
In short, build your savings while paying off your debts.
Month 5: Secure your home stash
At this point, if you’re paying yourself at least 10% of your income every month, you would now have an equivalent of 30% of your income saved. From our example above, you would have P6,000 already.
Take this cash and stash it in your home. This is your emergency money during holidays and long weekends when ATMs are offline, and other similar circumstances when you can’t withdraw from the bank.
Month 6: Open a savings account for your emergency fund
While it’s perfectly okay to use your salary or business account as your personal savings account, I recommend opening a separate account so it’s easier to manage and monitor. Besides, it doesn’t cost a cent to open a second savings account anyway.
Your emergency fund should at least be six months worth of your average monthly expenses. So if you spend P18,000 a month, then your basic emergency fund should at least be P108,000 – and yes, it’s that high because you don’t want to run out of cash when a money emergency happens.
Having financial security for at least six months allows you to look for a good-paying job, in case you lose your current one.
And it’s normally huge enough to cover several minor cash concerns happening all at once, or one major financial emergency falling on your lap.
At this point, three things should have become a habit for you:
- Creating and following a monthly budget;
- Paying yourself first and having the discipline to save every month; and
- Eliminating all your short-term debts
Starting Month 7 onwards: Take care of your health
If all things run smoothly in the first six months, you will experience a lull at this point when it comes to your finances. This is a good thing because you can now start to focus on other things.
The first on your list is your health because medical expenses are usually the ones that break a budget.
This is the time for you to get health insurance (if you don’t have one yet), establish an exercise routine, and start making better food choices.
Month 8: Protect your loved ones
Life is uncertain, and accidents happen when you least expect it – that’s why it’s best to protect your family from a financial disaster by acquiring term-life insurance at this point – especially for breadwinners.
Shop around for policies, play around your budget, and make a way to afford proper, basic coverage.
When choosing a company, make convenience and customer service your primary consideration; and choose an agent whom you’ll be willing to have a long-term professional relationship with.
Starting Month 9 onwards: Increase your income
People who reach this point will often become complacent in their financial habits. I couldn’t blame them because if you’ve successfully done all the previous steps, then I’m sure that you’re now financially stable – your debts are going down, while your savings are going up.
As such, it’s now recommended that you go back to your cashflow and explore new income opportunities to further accelerate the growth of your wealth. You can try freelancing, start a home-based business, or even join a network marketing company.
It’s time to explore other ways to make money, not only to create additional sources of income but more importantly to acquire the mindset and skills that will eventually help you quit the rat race within the next few years.
Starting Month 18 onwards: Learn about and start investing
If you’ve done everything right, your six months worth of emergency fund would have been complete by now, your short-term debts are already paid off, and you now have multiple sources of income.
The next item on your list is to start learning about investments – particularly paper assets like bonds, pooled funds, and the stock market – because this is where the money that you’re paying yourself first will go next after your emergency fund is complete.
Why study investments only at this point? Because in my opinion, it’s better not to get distracted and be overloaded with financial information during the beginning – when your goal is to simply develop good money habits.
Focus and discipline are needed to lay your financial foundation and bombarding yourself with various knowledge about investments will tempt you to go off-track from this financial plan.
Furthermore, I believe that the key to wealth is being able to live below your means and investing regularly for a long period of time. This won’t be possible if you haven’t mastered the most basic money management skills.
Month 24: Create a new financial plan
Finally, you’ve completed your 2-year financial plan, and it’s now time to create a new one. This time, take into consideration your short-term, medium-term, and long-term goals, and start planning accordingly.
Hopefully, you’ve acquired the necessary knowledge to develop a new financial plan that can now consider all your life goals, which includes a retirement plan.
If you’ve successfully reached this point, be sure to congratulate yourself on a job well done because you are certainly on your way to financial freedom.