Many are sure that in order for the money not only to be enough, but also to remain, it is necessary to earn more. As a result, they are looking for a new, higher-paying job, taking overtime, and so on. But capital formation still fails. Why? The key is that without personal financial planning, the business is initially doomed to failure. People who do not know how to optimize the flow of personal finances, with a higher salary, simply start spending more actively – and in the end they still go to zero. There is only one solution to this problem – to learn how to plan your income and expenses.
A personal financial plan is a document that outlines your financial goals and how you can achieve them. It can be long-term or short-term – for a month, a year, ten years, or a lifetime. In fact, this is an analogue of a business plan that is drawn up for the development of a company, only instead of it – your personal or family budget. Drawing up a personal financial plan includes several stages:
Stage 1. We translate dreams into goals
A carefully formulated goal is half the battle. Instead of the abstract “I want more money” – the concrete: “I want to receive $ 50,000 of passive income per month in 10 years.” This formulation is understandable, quantifiable, and financial instruments can be matched to it.
Your financial goals are likely to be multiple. For each you need to evaluate:
Time is when you plan to get things done. This can be a specific date (buy a car in 2 years) or a long period (20 years to receive an increase in pension).
Money – determine how much is needed. If you are planning to buy something specific, check the chart of price increases in the market and include this amount in the cost of the target. If the goal is stretched over time (for example, retirement period) – determine the target income per month.
Divide the stated big goal into small ones: calculate how much you need to save on a monthly basis.
Stage 2. We calculate income
Total income is made up of three components:
Labor income – wages
Income from the state – benefits, benefits, tax deductions.
Income from assets – this money does not appear as a result of direct labor, but a competent investment of capital. This includes income from securities, deposits, real estate, business, etc. The more profitable assets, the more money will flow in addition to earned income.
Stage 3. Counting expenses
Expenses are also divided into several categories:
Operating expenses – food, rent, transportation, treatment, recreation … Everything that is necessary to maintain the usual standard of living. Consider whether these costs include those that can be avoided. For example, buying an annual subscription to a fitness room, which you visit at most once a month.
Asset expenses – we pay them to make money. Bank account maintenance, brokerage services, business expenses, rented apartment renovation and others. At some points, you can save money: for example, many brokers have free registration and maintenance of a brokerage account.
Social spending is all we owe to the state: taxes and fines. Study the legislation: maybe you will find a more profitable taxation scheme for yourself.
Loan payments. These costs can also be reduced. Refinance a loan at a lower rate, use unprofitable assets to pay off debt, or extend the lending period. This will lower your monthly payment, but your overall overpayment will increase.
Stage 4. Protection of the financial plan
Life is unpredictable. Unexpected expenses, divorce, illness, economic crisis – all these unpleasant events put your well-being at risk. And along with it, the financial plan is undermined.
How to protect yourself from risks:
Solve problems ahead of time. Think about what might happen and how these events will affect your financial goals, how you can reduce their negative impact.
If you don’t have a financial cushion, it is worth putting it on your priority financial goals list. You should accumulate at least three monthly incomes and invest them in conservative financial instruments. For example, divide between a bank deposit with the possibility of partial withdrawal and investments in federal loan bonds. Government bonds can be with different maturities and frequency of interest (coupons) payments: you can choose the one that suits you depending on when you want to return your investment.
It is worth considering buying insurance programs for different types of risk and including this in the costs.
If you have unprofitable assets (for example, a stagnating business), they can be sold, and the proceeds can be put into the reserve fund or for insurance expenses.
Stage 5. Where to invest?
It is important not to keep all your savings in an envelope / safe / under your pillow. They will just lie there, not work – and gradually depreciate due to inflation. There are more attractive ways.
Conservative tools. Investments in them are considered low-risk. They give almost 100% guarantee of the safety of your capital, plus a percentage of income. Conservative investments include bank deposits, insurance savings programs, pension capital accumulation products, government bonds, real estate, ETFs. The downside of conservative investing is low profitability.
Aggressive tools. If you want to bring the achievement of the goal closer, and the potential profitability of conservative instruments is not enough for you, you can add aggressive ones to your portfolio. With this strategy, the risks are higher, but the profitability, as a rule, turns out to be higher. Such instruments include stocks, corporate bonds, investments in startups, currency trading, futures and options, mutual funds.
Stage 6. We execute the financial plan
So, the financial plan has been drawn up, and all the goals are achievable. But the work continues: after the calculation and refinement of the plan, it must be successfully completed. How can this be done? We use a modern version of the five-envelope method. We use investment products instead of paper envelopes.
- Having received a monthly income, we immediately set aside the required amount for financial purposes. And not in the nightstand, but in the previously selected financial instruments so that they cannot be immediately taken from there.
- The reserve fund, that is, the financial cushion, must include at least 3 of your monthly income. If the reserve is empty, set aside 1/12 of the total pillow monthly.
- Set aside money for annual expenses (car insurance, vacation, child’s school fees, etc.) – deposit again 1/12 of the required amount every month.
- Set aside the required amount for monthly expenses – but only after the first three “envelopes”. Operating expenses should not threaten your financial goals.
- Send the rest of the money to the motivation fund. From here you will take funds to reward yourself for moving towards your goal: entertainment, new clothes, weekend trips, etc. A small encouragement every month or a big one every six months – you choose.
With this approach, the increase in welfare will be quite comfortable, and there will be no need for austerity regime.
