Maybe you’ve received an inheritance. Maybe you’ve finally got some savings together. Or maybe you’re finally sick and tired of being stressed about money. No matter the reason it can be difficult to decide the best way to allocate money to maximize returns, minimize risks, and reach financial freedom. The Personal Finance Flowchart will break down step by step the best ways to allocate money.
The Personal Finance Flowchart;
Personal Finance Flowchart Step 0: Create a Budget
The first step is an extremely important starting point. In order to win with personal finance, you need to spend less than you make. To do this you need to create a detailed written budget with all your income giving every single dollar a purpose. This is the foundation for your wealth.
Budgeting gives you clarity for both your income and your expenses, which can then help you address your surplus. Just writing it down will help relieve stress and give you hope. Moneysmart has a free easy to use budget tool. Record all your income and record all your expenses and identify areas where you can reduce spending and allocate money to each area. Be sure not to go over the budget once it is established.
When looking at areas to reduce your expenses I want to draw focus to the four most important things: Shelter (paying your rent or mortgage), Food (not eating out, the bare essentials to survive), Utilities, and Transportation. These are the four critical things, address these first and pay the minimum on all your debt, anything after this is a luxury.
Personal Finance Flowchart Step 1: Build an Emergency Fund of $2000
The emergency fund is exactly that: An Emergency Fund. It is for absolute emergencies only and should be kept in a savings/checking account separate from your finances. This fund is simply there to act as insurance against emergencies. Instead of borrowing when your car breaks down your fund can be used to keep the wolf from the door and keep you on track.
Personal Finance Flowchart Step 2: Attack your Debt
Now you need to line up your consumer debt from smallest to largest (everything except your mortgage and student loans). List them all out and pay minimum payments on everything except the smallest. The smallest we will pay down as quickly as possible.
I know this may sound counterintuitive as mathematically we should pay off the highest interest first. However behavioral finance has shown that knocking out your debts smallest to largest creates momentum and a higher chance of getting it done.
Personal Finance Flowchart Step 3: Grow your Emergency Fund
After knocking down your debts it’s now time to increase your emergency fund to 3-6 months of expenses. This is going to allow a bigger security blanket for the unknown and help relieve financial stress with peace of mind. The 3-6 months is up to your judgment. If you’re in an uncertain place with your job or moving around a lot aim for the 6 months.
Personal Finance Flowchart Step 4 and 5: Retirement and Mortgage
Now that things are under control we can start to build wealth. These steps should be done simultaneously so we’re not leaving either step too late. You should max out your retirement to around 15% and pay off your mortgage as quickly as possible. A paid-for house is an excellent foundation for financial stability and wealth. By owning such a massive asset and never having to worry about rent or a mortgage again you can begin a path to wealth and financial independence.
15% is an excellent amount towards retirement while still leaving enough in the budget for general life. Check out our article on tips to maximize super.
Personal Finance Flowchart Step 6: Saving for goals and life
This is the final step and varies from person to person. First, you need to identify your goals and work towards them. Maybe you want to max out retirement further, to live a comfortable retirement. Any money you put into superannuation will be preserved until retirement. If you think you will want access to the funds before retirement you should skip this step. Maybe you like the idea of retiring early and financial independence. This is a whole separate topic but maybe maxing out super and creating a bridging brokerage account to see you through to retirement age is the way to go.
Generally we at Prophet like two types of assets: Property and Shares. When saving for things less than three years away we keep our money in cash, after this we keep our money in ETFs. For help getting started in investing check out our beginners guide here for all things investing in Australia.
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