Part 1: Financial Freedom
Part 1: The Beginning - The First Steps to Setting Yourself Up for Financial Freedom
Welcome! In this series, we'll explore how young people can set themselves up financially for the future. While this won't happen overnight, starting with small steps will pave the way to long-term success.
Today, we’ll focus on the first critical step: setting short-term goals.
Before embarking on any financial journey, it’s essential to set clear goals. Without a destination, you’re driving blind and won’t know which direction to take. Setting goals is the mandatory first step toward becoming financially secure.
To make this process easier, we’re breaking it down into three parts:
Short-Term Goals
Medium-Term Goals
Long-Term Goals
Today’s blog will shine a spotlight on short-term goals and guide you through the steps to set them effectively.
Short-Term Goals
Step 1: Know Where Your Money's Going
Step 2: Build an Emergency Fund
Step 3: Paying Off Credit Cards
Step 1: Know Where Your Money's Going
A problem defined is a problem half solved.
Before diving into future planning or savings, it’s crucial to understand where your money is currently going. You might be surprised to discover how much is being spent unnecessarily once you take a closer look.
Traditionally, budgeting can be done in two primary ways:
Using a Budgeting Platform
Pro: Conveniently online with pre-set formats.
Con: Categories can be too generic, and manual inputs are still required.
DIY: Excel Spreadsheet / Pen and Paper
Pro: Fully customisable and tailored to your unique financial situation.
Con: Requires significant time for setup and ongoing updates to ensure accuracy
Top Tip: Pouch simplifies the budgeting process—click to discover how!
Regardless of which method you choose, the goal remains the same: to see where your money is going so you can identify areas to reduce spending.
For example, when I created my first budget, I realised I was spending too much on dining out. By cutting back on restaurant visits, I was able to save significantly without sacrificing my enjoyment.
Now, I can go out knowing it’s within my budget, allowing me to have fun while still meeting my savings goals!
Step 2: Build an Emergency Fund
An emergency fund, or rainy day fund, is money set aside for unexpected expenses that life may throw at you.
According to Lloyds Bank, having “three months’ worth of essential outgoings in your account to fall back on” provides a crucial financial buffer in times of need. Calculate how much you should have in your emergency fund here.
Starting your savings journey by building an emergency fund is a smart move. While saving for a new car, a summer holiday, or new clothes is exciting and worthwhile, having an emergency fund is essential for protecting yourself when life throws unexpected challenges your way.
It’s fantastic to have multiple savings goals—whether for short-term pleasures or long-term security. Enjoy your money and plan for experiences like your next Christmas trip, but don’t forget to set aside a small starter emergency fund as well.
Top Tip: Pouch lets you view all your savings goals in one place. Click to learn more!
Step 3: Paying Off Credit Cards
There’s ongoing debate among financial experts about whether you should prioritise building an emergency fund or paying off credit card debt first. There is two ways to look at this:
Having an emergency fund can prevent you from relying on credit cards when unexpected expenses arise.
High-interest debt can significantly impede your progress toward other financial goals.
To help you decide which approach is best for you, check out this comparison of saving versus paying off debt here.
Depending on how much credit card debt you have, different repayment strategies may be more effective:
Approach 1: Debt Avalanche
The Debt Avalanche method focuses on reducing the amount of interest paid over time.
Here’s how it works:
List debts from highest to lowest interest rate.
Set a fixed monthly amount for debt repayment, excluding essentials like rent and groceries.
Pay the minimum on all debts except the highest-interest one.
Apply any extra funds to the highest-interest debt.
After paying off the highest-interest debt, move to the next one.
This method minimises the total interest you pay, though it may take longer to see reductions in your overall debt balance.
Approach 2: Debt Snowball
Popularised by financial expert Dave Ramsey, the Debt Snowball method focuses on paying down the smallest debts first to build momentum.
Here’s how to do it:
List your debts from smallest to largest balance.
Pay the minimum amount on all debts.
Direct any extra funds toward the smallest debt.
Once the smallest debt is paid off, move on to the next smallest debt.
Continue this process until all your debts are cleared.
The Debt Snowball approach offers quick wins, which can be motivating, but it may result in higher interest payments overall.
Choosing the right approach depends on your financial situation and the amount of debt you owe.
Pouch's Final Thoughts
Today, we covered the first steps to set yourself up for a more financially secure future.
Goal-setting is crucial, and having clear, actionable strategies is key to achieving those goals.
Once you’ve established your short-term goals, stay tuned for guidance on how to set medium and long-term goals to continue your journey toward financial security!
