Have a Personal Finance Strategy

by Kate on November 10, 2010

in Money

Something I used to be guilty of, is thinking that I would achieve financial success without having a strategy to do so. The thought that I might need to be serious about organising my personal finances, and make plans to increase them, only occurred to me when I started to be involved in managing business finances at work. Everyone knows that a company needs to have a strategy for growth and direction, so why do we expect our own financial situations to get better without making plans and taking action?

My initial strategy was to invest in some personal finance software and save money to invest in the stock market and eventually property, so that I could achieve a mortgage free life and build an early retirement fund. I didn’t get it right from the outset, although having the plan has enabled me to analyse the trajectory of my savings, and make adjustments to align it with my goals.

Start a Savings Plan

In the beginning (Phase 1) my strategy was simple (a bit too simple)

I diverted 20% of my income each month into a savings account. You might think that 20% isn’t achievable, although I think you’d be surprised at how easy it is when you really dedicate yourself to it. Still not convinced? Go and have a look in your wardrobe, kitchen cupboard or living room. Be honest, how many things did you find that you don’t use or need? I was the same, I would buy something without considering if I would get the value back out of it. Respect the money you earn, you worked hard for it. Treat the savings like your other monthly bills, set up a regular money transfer to your savings account, and forget about it. Once you get it into your head that the money is totally unobtainable, you’ll soon start to budget with the remaining money.

My plan for Phase 2 was to invest in the stock market, although I quickly realised that 20% of my income was never going to give me anything like enough capital to get me to where I wanted to go. I did 2 things to increase the amount I was saving.

Firstly, I further decreased my expenditure. You can read more on how I did this in 11 tips to minimise your spending. This process is not about frugality, it’s about realising that we are conditioned to spend our money on convenience items, like ready made pasta sauces. With a little reconditioning, you can learn how to live without many of the items that we take for granted. Once you start to curb your consumerism, you won’t feel like you are being frugal, or going without.

Secondly, I boosted my income by seeking a better paid job. I was comfortable in my role, and it was a good job, although it wasn’t helping me achieve my goals, so I found another one. I gave myself quite an aggressive goal to achieve, and I wanted it badly. I was prepared to make big changes in my life in order to achieve it.

At this point, I was saving 50% of my income. I know what you’re thinking…

“50% I CAN”T DO THAT!”. Yes you can. It wasn’t easy, or something that I achieved overnight. it took a while to adopt the habits necessary, although it is achievable. If you’re looking for inspirations, check out Jacob and his extreme ideas on early retirement, and Tammy on simple living.

Invest in something that you understand

I maintained this strategy for a couple of years, all the while channelling the extra income and savings combined, into my savings fund.
It was at this point, I felt ready for phase 2 of my strategy. Before, I purchased a single share, I invested a lot of time into learning how the stock market worked. That didn’t stop me from making any mistakes when I eventually did trade, although I have learnt a great deal, all of which I’ll share in this blog. Sign up to my RSS to receive updates.

My second type of investment came in the form of a holiday cottage. Earlier this year, my partner and I saw an article in the paper about a man selling his portfolio of unusual properties, and we went to have a look at a few. We decided to buy a tiny former blacksmith’s cottage not far from the coast. Ty’r Gof fits in with the whole curb your consumerism ethos, it’s a beautiful digital free cottage, immersed in the peaceful countryside of west Wales. It was also really important to us that we could offer guests who stayed in the cottage great value for money.

By now, I had an official second income alongside the income from my day job. It wasn’t huge, although it gave me the financial security that I was looking for, and the reassurance that I was going in the right direction. Up until that point, it had been all faith and sacrifice, I found it helpful to set milestones along the way, although nothing works quite like cash trickling in.

This is my story, and as you can see, I had quite an ambitious goal. It may be that your goal is smaller, perhaps you want to save for a holiday each year. It doesn’t matter what you want to accomplish, unless you have a strategy, you’ll never get there.

Start simple, but start now!

Good luck.

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