Think about the recent economic impact of COVID 19, particularly for the service workers or those in a lower paying or a manual labour type job. Many are still struggling financially. What about the devastation that COVID caused small business in service areas such as restaurants, bars, travel agencies, just to name a few? Maybe COVID put a hole in your financial situation that you are trying to get out of?
When your main income source is shut down, what alternatives are there?
Now no one couldn’t have seen the devastation (both physical and financial) that COVID would impose however it’s safe to say that there will be another financial crisis in the future. Maybe crisis isn’t the right word but there will be a significant economic downturn so you want to be prepared.
This is where the benefit of having income streams comes in. If your boss all of the sudden wants to release some of his or her staff and you are one of them, having a nice stream of income from an online business or an investment property helps cushion the blow.
Now that’s easy to say if you have a head start such as a nice house, decent savings and an investment portfolio that you are currently adding to. What about if you have a lot of personal debt, living pay check to pay check and little chance to get a pay rise any time soon?
For some this will take longer to build than it will for others. You may be a single parent with limited ability to increase your work hours, you may be caring for an ill family member that takes a lot of your time or you may be a university student up to your neck in study (and student debt) and not a lot of time (or money) to work on your financial situation.
However little time you can spend on your situation, do it, even if it’s only 15 minutes a day. Be as consistent as you possibly can, it will pay off in the end. Just don’t give up!
Now let’s look at some ways to bulletproof your financial situation.
1. Think and believe you can achieve this
Even if you are currently broke, with limited income and a lot of debt, you can get out of your financial situation! Now your thinking will more than likely have to expand as will your mindset however you’ve got to believe it can be done and then start acting as if it will happen and match this with a dedicated work ethic.
No wishing, no hoping, just true belief matched with an equal amount of work ethic.
Still struggling to believe that you can’t get out of your less than desirable financial situation?
Making excuses along the lines of believing that you aren’t smart enough, or that you don’t have enough money, that you don’t have enough contacts, that you don’t have enough education, that you are too old?
There are countless examples of people who triumphed against massive odds, people succeeding in war torn countries, people succeeding in spite of a violent and horrible upbringing, people who have succeeded despite significant health and/or physical setbacks.
Have a look at these success stories. Jon Morrow and Cory Lee are both confined to a wheelchair yet that hasn’t stopped them achieving online success. What about the story of Srikanth Bolla, the blind businessman overcoming amazing odds to build a multi million dollar company or the young Pakistani activist Malala Yousafzai shot for speaking out against an oppressive regime who went on to inspire millions and win a Nobel Prize? Or the ex prisoner of war who became a successful US politician and I’m sure many of you are familiar with the story of Viktor Frankl.
These are just a small sample of the success stories we know about for people who succeeded in spite of the odds being substantially stacked against them. There’s plenty more examples similar to these around the world where you can see than anyone from any situation can overcomes odds for financial success!
Chances are most people reading this are relatively healthy and able bodied with two arms and two legs, eyes and ears that work. Don’t take this for granted. The quicker you cut out the excuses, the woe is me attitude and the general lack of belief, the quicker you will turn your financial situation around!
2. Create your personalised financial plan
What steps do you need to take to either grow your current financial situation or turn an undesirable financial situation around?
Let’s start with a thorough review of where you are financially. To get to where you want to go financially, you need to know where you are starting from, this mean total household income, total household expenses and total household debt.
When was the last time these were reviewed or tracked? If they haven’t been reviewed in a while this needs to be the first thing you do. Print out a recent statement of your bank account, credit/debit card(s) basically everything that you have used to pay for your expenses. Go through these expenses and mark each of them with one of three categories, essential item, marginal item (not essential not luxury) and luxury item.
*Exclude debt repayments for this portion of the exercise as we will be calculating these separately a little later*
For example rent/mortgage is an essential item, something such as a newspaper or online subscription could be classified as a marginal option and buying new clothes each month would be a luxury item. Now essentials to one person could mean luxury items to another however when going through this exercise try and keep a tight list for your essentials.
After going through your list what does it look like? Calculate your total lifestyle expenses over the period you tracked (1 month or 3 month) and annualise this. Then break down what you annual essential, marginal and luxury expenses each add up to.
This one is pretty simple, find your receipt pay slip, last annual personal tax statement or review your bank statements, plus any net income from investments such as rental income or share dividends, what is your total net household income (after tax)?
Hopefully this list is easy to calculate and that you have a reasonable understanding of your debt and the amounts. If you are someone who puts their head in the sand when it comes to debt now is the time to find out exactly what amounts you owe and to who you owe these to.
Get a list of all of your debts (even those you owe to family and friends) including monthly repayments, interest rates, monthly payment dates and the date in which the loan is due to be repaid in full (if applicable).
Regarding your total amount of debt owed keep this amount to one side and once you have started your new household financial hub with regular debt repayments we will be reviewing this amount every 3, 6 and 12 months to see how far advanced you are in repaying your debt. There is nothing better confidence wise see your total debts owed shrinking as a result of your budgeting and hard work!
Add up the total monthly repayments, how does this look? If you haven’t ever done this before and you have a lot of personal and credit card dent this can be a scary exercise and you may be feeling rather nauseous. Trust me it will get better once you make that commitment to paying these down and improving your financial situation however you need to know exactly where you stand financially to get this improvement plan started!
Now some of your debts might be investment debts and depending on your country will be treated differently (tax wise) to personal debt however all debts have repayments so these are part of your budget. Only you and your accountant and adviser can determine whether you should be paying more off of these investment loans however in nearly all cases personal debt should be the focus before investment debt is repaid.
Household Surplus or Deficit
From the above exercises you should have your household expenses (broken down into essential, marginal and luxury), your total debt repayments (as well as your total levels of debt) and the total amount of household income.
Now add your annual expenses plus your total debt repayments to get your total expenses then take these total expenses away from your total household income and what do you have? Hopefully it’s a surplus.
Now go back to your net household income and take away from this your total annual essential expenses plus total debt repayments, what does this give you?
The difference in your (hopeful) surplus of current lifestyle expenses/debt and your essential expenses/debt is the amount you can play with if you really wanted to focus more on your debt repayments (aside from any increases in income) and only you can determine how deep your budget cuts need to be (though the deeper your financial issues the more deeper cuts need to be made).
In the above household expenses exercise we are going to assume that you have reviewed your credit cards/bank/mortgage, utilities, phone and internet provider, etc. to see if you are getting the best rate available. If not get reviewing, this could save thousands every year!
*Now if you want to cut the essentials even more you could look at cheaper housing options or cheaper food options though we will only suggest this in a very dire financial situation.*
For those with a deficit… it’s time to get some deep budget cuts or to go about increasing your household income which we go into more detail later in this article. If your situation is quite dire we suggest you reach out to your debtors to establish a suitable repayment plan in light of your circumstances. Again don’t lose hope if this is you!
Yes a lot of hard work needs to be done however YOU CAN GET OUT OF THIS with hard work focus and discipline.
For those with a surplus…Two things, firstly what does your current financial set up look like, i.e. where does your pay go, how do you pay for your expenses, debt, mortgage, etc.?
Secondly given your current set up where does your surplus go to? Does it go to a separate bank account or emergency fund, does it go towards your mortgage or paying down other debts?
If your current situation is working then don’t change anything. For those that are looking for a suggestion with their personal financial structure our personal choice is what we call setting up an automated financial hub.
Setting up your Automated Financial Hub
The basic version (as per the diagram above) is having a central account or a financial hub where all income and expenses goes through. To start either transfer a small amount into a designated everyday transaction account (or wait until your first pay is deposited into this account) and slowly add all of your regular lifestyle expenses to come from this account (either through direct debits from this account or from a debit card linked to this account). Now you may not have enough funds in this account initially to handle all your lifestyle expenses so slowly add the relevant debits or expenses once there is sufficient funding (you don’t want any missed or bounced payments).
*We prefer debit cards rather than credit cards (particularly for those in less than desirable financial situations) however if you are one who likes to use a credit card for points or rewards and is disciplined enough to make the full monthly repayment then use a credit card.*
Eventually your savings will build up in the everyday transaction account and we recommend you keep about a month worth of savings in this everyday transactions account as a buffer in case you accidently get double billed one month or a rogue debit comes your way. The surplus amounts will then get directed to your higher interest savings account to build up your emergency funds then will be directed to building your passive income investments.
3. What are your Financial Goals?
Once you’ve set up your automated financial hub it’s time to work on what financial goals you want to achieve. Let’s look at some examples that you may want to work towards.
Financial Goal I
Increasing your household income
Depending on your situation will depend on what you can do to increase your household income. Those with more time on their hands or less personal commitments will obviously have more options however don’t despair if money or time isn’t in abundance for you.
Let’s go through some suggestions about how to increase your household income to find something that will suit your current circumstances.
Ask for Pay Rise
- With your current job or applying for a new job that will pay more
Look for a Second Job
- If the above option is off the table, is there a way you can look to get a 2nd job?
- Can you get a delivery job?
- What about a job working as a shelf stacker at a local supermarket?
- Can you babysit children of friends or family members?
- Any seasonal jobs you can take on such as store needing extra staff around Christmas?
- Any bartending or waiting jobs in your local area?
- If you are suitably qualified can you do part time teaching?
- Is there a sports stadium locally that needs staff?
- Are there any secret shopper style jobs available in your area?
Start a Side Hustle
- Selling unwanted or unneeded household items
- Create Arts and crafts
- Setting up a local gardening business
- Local car driving service
- Tutoring or teaching people a skill such as a musical instrument
- Baking or Cooking for people locally
- Running personal errands for local people (i.e. shopping, medicine, etc.)
- Renting a room or your house through services such as Airbnb
- Renting out your car
- Renting out your household items such as tools
- Monetizing a hobby such as photography, copywriting or graphic design skills
- Selling old collectables such as sports cards or memorabilia, valuable coins
- Setting up local tours around your town or city
- Can you set up a cleaning service for friends, family or neighbours
- Can you set up a basic gardening service for friends, family or neighbours
- Can you pet sit for friends family or neighbours while at work or when they are away on holiday?
- Can you become a professional house sitter?
- Can you set up a local party planning gig?
- Can you set up a local dog walking gig?
- Do you speak a 2nd language that you can teach to others?
- Scale your side hustle (i.e. turn your tutoring into an online course)
- Sell your arts and crafts (via sites likes Etsy or eBay)
- Online freelancer using sites such as Fiverr or Upwork (This could include data entry, researcher, virtual assistant)
- Selling products via Amazon through their FBA program
- Setting up a website to sell a product or service
- Set up a YouTube channel to show off your skills such as cooking
- Set up a paid newsletter around a topic your are skilled in or highly knowledgeable using Substack
- Participate in online paid surveys
- Investing in shares
- Investing in property
- Investing in bonds or fixed interest securities
- Investing in alternatives such as currency, derivatives, commodities, collectables, crypto (this category comes with an exclaimer as they can be volatile particularly crypto and only a very small portion of your net wealth or income should go towards these types of investments).
- Investing in a business (brick and mortar or online)
There are plenty of examples above that nearly anyone can attempt and build some additional household income. No excuses if you are dedicated to improving your financial situation you will take that next step even if it means getting out of your comfort zone!
Financial Goal II
Emergency funding target
Go back to your essential lifestyle expenses (including debt repayments), how much does this add up to for 3 months? That should be your first aim for your emergency funds target. If you can have 3 months of lifestyle expenses in your savings account that is a nice cushion in case of need. Once you’ve hit 3 months, then aim for 6 months to 12 months worth of essential lifestyle expenses (including debt repayments) as your emergency funds goal.
Now some of you might be putting your surplus income straight off your mortgage and it has a redraw facility which is fine if that’s your preference however if for some reason the bank stops you redrawing we’d prefer to set up an offset account against the loan that way it’s in a separate bank account.
Financial Goal III
Start Your Passive Income Journey
Once you’ve hit your 6-12 months we suggest you start your investment program (we discuss the types of investing here in more detail should you want more information).
Some will start earlier and that is an individual preference though we are more conservative and would favour close to 12 months of lifestyle expenses before investing.
Now the type of investing will depend of the level of experience you have in that area as well as the time and capital that you can devote to this. For most people this might be investing a few hundred or so into a managed fund or building a deposit for an investment property.
Others with more financial savvy may look towards share market trading using financial derivatives, contracts for difference (CFD’s) or even dipping their toes into the cryptocurrency arena. These investments rely on substantial investment knowledge and these investments can be rather volatile (particularly cryptocurrency). If investing in this area it should form a small part of your investment portfolio and an even smaller portion of your total savings and investment portfolio.
For those that have struggled with financial discipline once this structure is set up and you see it working and your savings and investments begin to build up, your confidence grows, a sense of pride kicks in then your financial goals expand to bigger things
Financial Goal IIII
Replace your main employment income
Now the time between step 2 and 3 will take longer than the step from 1 to 2 however it will worth the wait! For a lot of people their dream is to quit their job and spend their time doing something they love. That’s what our aim for you is too. To build up sufficient passive (or active) income streams that will enable you to replace your current job income so you can live life on your terms.
Now this could take the form of a substantial share or property portfolio, a small business (both bricks and mortar or an online one), a portfolio of niche websites or a mixture of all of these.
Given that you’ve been tracking your monthly lifestyle expenses since the beginning of this exercise you know what it costs you to live each month and you know what your passive income streams need to provide to enable you to leave your job.
Some of you like your job and might want to go to a part time role as you enjoy the role and the people you work with. That’s fine, passive income streams enable you to do this and the soon you start working on building this up (and building your solid automated financial hub) the quicker you will be on the path to financial independence and a life you live on your own terms!
No matter how bad your situation may appear, don’t give up! Hopefully there are some ideas you can take from above to work on your personal financial situation. If you are in a good financial position, great keep working on this, keep building your income streams and keep working on your journey to financial independence.
If you are starting further behind financially yes you will have to work harder to catch up but it can be done and financial independence is definitely achievable if you put in the work, stay focused and disciplined. Review your situation, know your income and your budget, set up your savings hub and get cracking on your investment journey!