Following Taking control of your money: Part 1 you’ve;
- decided what it is that you want in life
- assessed your current financial situation
- set up a realistic budget.
If you haven’t, check out part 1 (steps 1-3) and take action to move you closer to your goals. Setting things up requires more effort initially but once in place it’s just a case of maintaining. Over time you will see why the initial effort was worth it.
So let’s get back to the steps…
Step 4 – Establish how much you will need to make your dreams a reality
One of my goals is to become financially free LONG BEFORE retirement age, (currently 65 in the UK, increasing to 68 for most of us millennials). Let’s say I wanted to have £27,000 per year in passive income (money that comes in regardless of whether I go to work), using the 4% rule as a guide I can work out that I would need £675,000 in assets to generate that income:
27000 / 0.04 = 675,000
The 4% rule / Safe Withdrawal Rate is the maximum rate at which you can withdraw from your retirement savings without causing it to run out in your lifetime.
If you wanted a second home in a tropical location, the starting point would be to research how much similar houses go for in that location.
Step 5 – Start paying yourself first
Don’t save what is left after spending; spend what is left after saving – Warren Buffett
We get paid by our jobs but we spend most of that money paying others through bills, groceries, shopping and other expenses. The thought process is usually “I’ll save whatever is left after I’ve paid for X and Y”. It will be a struggle to achieve your goals doing that; they need to be a priority.
Decide on an amount that you are going to save each month in pursuit of your goals. You could start with 10% or even £20. The key is that you commit to that amount each month. As you start budgeting and reviewing your spend, you’ll find that you can save even more as you continue to eliminate wastage. If you’re in a break even position where your income is covering your expenses with not much to spare, you could try some of the following options to boost your income:
- Asking for a pay rise – This happens more often than people believe, but before you burst into your manager’s office you will need to research and prepare. Check out these tips at Business Insider. Even if you don’t get the increase, you won’t be left wondering what if.
- Moving to another position with a higher salary – if after doing your research you find you are being paid below market rate and have tried step 1 with no joy.
- Get a side hustle/develop other avenues in your spare time to supplement your income.
Step 6 Make it a priority to pay down those debts
Repeat – Make it a priority to pay down debts! The credit card with a £3,000 balance from the last shopping splurge or holiday – it’s time to do something about that!
Rank your debts in order starting with the highest interest rate balance first. Credit cards are most likely to be at the top of this list given their high interest rates. Where you aren’t sure of the interest rate do the following:
- Call the supplier and ask for confirmation
- Ask to see if they can reduce your interest rate to 0% (yes you can do this –you may not get 0%, but they may offer you a rate reduction so it’s worth a try).
- Look to see if there are cheaper options such as a 0% balance transfer offering (there will most likely be a fee associated with this, however in most cases it will still be lower than the interest you are paying if you can’t clear the balance).
Focus on paying down the debt with the highest interest rate first, making minimum payments on any others. This is known as the debt avalanche method. Given its more focused approach on higher interest debt it will help you clear balances quicker and works out cheaper.
Now in order to make this effective – avoid putting additional balances on your card. If you must, pay the new balance in full at the end of the month.
MOST IMPORTANTLY: Remember it took time to get into debt so it will take time to get out of it. Patience, consistent action and self-control will get you there – again, be sure to automate payments where possible!
Step 7 Monitor your progress & Adjust where necessary
See how your current budget plan is working. I like to do this on a monthly basis, just prior to pay-day. By doing this you will keep tabs on how close you are to reaching that savings/investment goal or becoming debt free.
If you find that you aren’t making progress as anticipated then you may need to make an adjustment to your plan. If you find yourself getting frustrated or struggling to stick with your budget (not through a lack of commitment); it can be a sign that your budget isn’t working for your circumstances. In this case don’t give up – tweak and carry on!