You have to take financial literacy seriously as it is a fundamental part of your life.
Anybody mature enough should realize that money is essential for their family’s needs when it comes to food, education and health. Life events like marriage, having a child and graduating all need money. And of course, future goals like traveling and vacation, owning your own home, and maybe even owning a luxury yacht all need money as well.
Personal finance may seem like a difficult topic but with time and effort, you can effectively learn and apply basic concepts that can elevate your personal financial condition. In fact, you don’t need any formal education to master the basics!
All you need to do is follow these 7 easy steps! This blog will outline the basics of these steps. Yes, just the basics for now as some of these steps require a whole blog post by themselves, which I will make in the future. Stay tuned!
(There are a multiple versions of these steps depending on who you ask, but each one is essentially the same in principle, so don’t worry too much about the differences! The most popular version is probably Dave Ramsey’s but he didn’t create this either. As he said, and I quote “The principles are not mine. I stole them from God and your grandmother.”)
Step 1: Determine Your Current Financial Status
This is the easiest part.
All you have to do is spend a few minutes today to determine a few things listed below. You don’t have to be accurate to the last peso as estimates can suffice.
- Your net monthly salary
- Your monthly expenses
- Your monthly net extra cash (net salary – expense)
- A list of all debts that you have
- Total cash you have saved so far
This information is very important for you to understand your current financial situation. And if you notice that information 1 to 3 is used to make monthly budgets, then you are correct, as that is also part of this step.
Also, I get several questions here like: What if I don’t make enough money every month to cover my expenses? Or, what if my net salary is exactly enough to only cover my expenses?
Those questions can usually be answered with a budget and, if not though, then there are other solutions.
I will definitely make articles over the next few weeks about how to actually do super easy budgeting, and your options on making more cash. You can follow our Facebook page or Twitter to get more updates. Also consider joining our mailing list.
Step 2: Save Cash Equal To One Month Expense for Emergencies
This step can be skipped if you don’t have any debts.
The point of this is to make sure you have money that you can use for situations not in your budget. This includes health-related expenses not covered by your health insurance, your car or house needing repairs, necessary appliances breaking down and other unexpected emergencies.
This is necessary to do since you don’t want to be in a situation where you have no cash for emergencies and where you would be forced to sell your investments, or worse, you’ll be forced to borrow more money, adding to your list of debts.
I advise keeping some of the cash at home at a secure place and perhaps some at the bank.
Remember: don’t let anyone, especially yourself, spend the money unless it’s an actual emergency!
Step 3: Payoff Your Debts Fast (Using the Snowball Method)
In this step, you will concentrate on paying all your debts as early as possible, but NOT including the mortgage/debt you have on your home yet. You should still be paying your home debt with the minimum monthly payments but you will be paying them early in step 6.
It’s best to pay off your debts using the snowball method. With this method, you pay all your debt’s monthly minimum payments like usual AND use your extra cash per month to pay your smallest debt in advance. Once your smallest debt is fully paid off, you’ll then proceed to the next smallest until you fully pay all your debts.
Paying your debt more than the required monthly amount means you’ll pay less in total and you’ll finish paying faster.
As a real world example, let’s take Anna and Bea, two people who made the same loan from the same bank with the same interest rate and monthly payments. The only difference they had is that Anna does not make additional payments to the required monthly minimum, while Bea does her best to make a 4,000 additional payment in addition to the monthly required payments.
Below are actual amounts relating to how much total interest they will end up paying as well as the total time they need until the loan is fully paid.
As you can see from the image above, an additional 4,000 monthly payment will decrease the total interest paid from 36,606.39 to only 24,438.03! Besides that, the total time needed to pay decreased from 34 months to only 23 months!
A lot of people I talk to are usually in this step. Some finish this in a couple of months, some are still doing it after 5 years.
It’s important to understand that it doesn’t matter how long this step takes, what matters more is that you keep doing the snowball until you finish. It gets better as you pay more debts, so hang in there!
There are more that we can talk about here, like why the snowball method usually works better than the other method, which is the avalanche method. We can also talk about how you can do the avalanche method, if you are able to. This will come in another blog over the next few weeks!
Step 4: Save About 3 to 6 Months of Expenses for Emergencies
After all your debts are paid, you can now start saving more for emergencies. And yes, this is just like step 2 but you have to save more than one month’s worth in this step.
Again, this money will be used when you have unforeseen expenses that are not part of your usual monthly expenses like house/car repairs or accidents and other health-related cash outflows not covered by your insurance.
The number of months depends on how much you’ll be comfortable with. Personally, I started with 3 months of savings when I did not have dependents. Now that I have a dependent, I went for the full 6 months.
As mentioned in step 2, don’t let anyone, especially yourself, spend the money unless it’s an actual emergency!
Step 5: Start Investing for Retirement, Children College Education and Your Other Big Goals
Essentially, if you want to turn your money into more money, you’re going to have to do investing. This is where you can turn your couple of thousand savings per month into millions. No, seriously.
Unless you’ve been living under a rock in the last few years, you’ve probably heard of Bo Sanchez. Well, his maid invests about P2,500 per month on the stock market. That was years ago. Now, his maid is a millionaire!
Most people think investing is complicated and time-consuming but that view is very wrong. Investing can be easy to do, take only about 10 minutes per month and can be virtually risk free.
The catch? It’s going to take a long time. We’re talking at least a decade or two. This is where your patience and emotional control will be tested. However, the rewards will be great for those who wait!
Going back to Bo Sanchez’s maid though… I couldn’t believe it either when I first heard it. So, as a CPA and financial analyst, I did the math. The average returns for the Philippine stock market is at about 15%, and with her investment of about P2,500 per month, it would only take her about 12 years to be a millionaire!
Check-out our article on Why You Should Be An Investor Right Now!
Most of our blogs will be about investing. A lot of articles about proper investing in stocks, bonds and other investments are coming over the next few weeks, so in case you haven’t followed it yet, here is our Facebook and Twitter, or just join our mailing list.
Step 6: Payoff Your Home Early
You probably already understand what you need to do here. Essentially, once you have completed step 4 and started to invest in step 5, you should start thinking about allocating part of your extra cash to paying your home early.
The principle for this is the same as in Step 3. You pay off your home mortgage early so you’ll pay less in interest. You’ll also rest better at night knowing the house you sleep in is fully paid and 100% yours!
And that’s it for this step. Short and sweet.
Step 7: Build Wealth and Start Giving
At this point, you’re essentially problem free financially.
If emergencies happen, you have a 3 to 6 months emergency fund.
If you have children, ideally you have saved up and invested enough money so their tuition and other school expenses are covered.
Maybe you’re retiring or almost retiring but you’re not worried because you already have a good amount invested in your retirement funds.
Maybe you are decades away from retirement and you have already saved up so much more cash that you’ll ever need so you start using some to travel to a few different places around the world, while still making sure that you keep investing extra cash and not overspending.
In any case, you’ve basically done it. You have problems, but money is not one of them. This is the final step where you just continue investing and being financially responsible to increase your wealth even further, and maybe start enjoying the fruits of your hard labor.
However, there is also the 2nd part of this step, which is about giving.
You can start giving some amount to a charity you believe in. Perhaps you can help out younger relatives that does good in school but cannot afford the degree that they want.
There are a number of ways you can give back to society so just think about how you want to go about when it comes to giving some of your blessings.
If you’re not at a point where you can start giving out money, you can still give in different ways. Know a person who wants to learn about personal finance or investing? Why not refer this blog and other sources that you have?
You can also teach them the basics yourself. You can be creative in the way that you “give”.
I hope you’ll use this information to plan out your financial life. Come back to this article every now and then to re-assess where you currently are in the steps.
As I’ve mentioned, these are just the basics though. There is so much more that we can talk about in each step, especially in the step about investing!
Please wait for the lessons, guides and tips on our future blog posts, which I promise are coming every Wednesday and Sunday. So, join our mailing list and follow us on Facebook and Twitter, if you haven’t already!
Right now, though, you should be able to determine which step you’re currently in. My sincere hope is that you can proceed to the next step soon and reach step 7! Until then, keep learning about personal finance and investing!
Good luck, and I hope you learned something!
So, which step are you in? Tell us with a comment below!