Will I be ok?
This is the most fundamental question our clients ask themselves.
Hi! My name is Jacky and I’m one of the co-founders of Novella Wealth. At Novella, We want to shed some light onto this topic of Wealth Guidance and share some knowledge and tools here, in these articles.
In this article, I’ll be going over an easy way to manage your cash flow so that you have enough to spend today and save for tomorrow.
No one likes the word “budgeting”, it creates a sense of constraint and although we know it’s ultimately good for us, the act of setting a budget and not abiding by it can seem like failure.
And no one likes to fail! I would invite you to simply start by setting some targets. some of our clients have seen success through simply maintaining a balanced income diet.
First, Know exactly what your monthly take home income is; not just your annual income divided by 12, but what you physically have biweekly in your bank.
40% of that should go towards your housing cost.
35% of the remainder should be allocated towards your standard of living, the day to day spendings.
Then finally 25% of your income should go towards financial planning.
Big number right?
Now don’t get me wrong... I am not saying you need to stick this all in your investment or savings account. We should have a plan. I normally look at this as the balancing act. In the most ideal situation you should allocate 1/3 to Short Term Savings or Debt Management.
1/3 towards Mid-Term Savings, things that would require some level of effort to save and put away.Finally the last third would be for your Long-Term Savings, this is primarily your Retirement Savings.
Now that we have a breakdown of your basic finances coming in, we can move on and address the big elephant in the room. Debts!
Mortgages. Credit cards. Lines of credit. Student loans. Business loans. Debts has many forms! We all love to spend money, but who likes actually paying it. The number one question we get surrounding Debt is: whether you should pay off their debts first, or save first? how do you decide?
First, It depends if it’s good debt or bad debt. Bad debt is simply, anything that is not helping you make more money. It does not appreciate in value.Car loans. Credit card bills. These are things that continue to suck the life out of your wallet as it accrues interest AND depreciates over time.
Good debt includes: Mortgages, student loans, anything that appreciates your value in the future. by taking advantages of tax deductions and appreciation. So, for bad debt, yes, absolutely, pay it off first. The interest will continue to rise and cost you more money. Once you’ve set aside a plan for budgeting we recommend using your short term savings towards these debts.
There are primarily two best practices that we see: Pay off the highest interest first or Pay off the lowest balance first.
From a dollar to dollar perspective, the first method is more efficient because it cuts down on the interest you ultimately pay. But from a real human perspective, the second method sometimes will be more effective in the long run. And small quick wins are vital to build good habits. Like anything you do, these are habits you’re building, and when you can change your perspective to “I don’t know if I can.” to “wow, I actually did it.” you’ll realize really how simple it really is, and that you CAN do it. Debts are only a problem when they are mismanaged. Get educated on how loans can grow your future wealth when invested in the right things.
Financial management doesn’t mean changing your lifestyle, it just means building different habits to lay down the foundation for your future financial well being.
This new philosophy of money takes time to get comfortable with, just like any change in habit that you incorporate into your life, it will take time, but it's worth it. Your future self will thank you!
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