Personal financial planning is not as complicated as many would want you to think. Here, you’ll learn a few simple steps to get started today!
What’s your perception of your financial state? Are you someone who’s able to plan ahead or do you still have a tough time keeping up with the monthly bills? Regardless of what may apply to you, this article will show you some simple tips that can help you get your finances in order. This will leave you with more time to focus on other things in life and approach matters without stress, one at a time.
After all, what is personal financial planning?
Personal financial planning is nothing more than a set of measures that aim to improve the control you have over your money and finances. At times, it’s a necessary tool that may give you insight into your current situation.
Personal financial planning acts as a map of sorts, which shows where you are and what you’ve to do if you want to reach your end goal. It’s crucial to remain calm even when push comes to shove, and if you do, your wallet will be thanking you in no time.
Why create a personal financial plan?
The first reason why personal financial planning is important is the fact that it’s the money we’re talking about – and nothing more important than protecting what’s yours. Furthermore, properly done financial planning puts you one step away from financial freedom and independence. Who doesn’t want that, right?
Another factor that you should take into account is that life is full of unforeseen circumstances — the pandemic we lived through is a testament to this. If you’re not prepared, you’ll have a difficult time pushing through contingencies that may arise.
And there’s always more. Money, aside from being essential for our survival, is necessary for achieving our goals – whatever they may be. Therefore, keeping your finances organized and planned down to a single dollar is the only possible way to reach your goals.
Personal financial planning: see the step by step
The first thing you need to keep in mind is that personal financial planning doesn’t have to be difficult. The truth is that you can start with very simple steps, and then move on to bigger things as you gain experience. Some of the things you can do include:
Knowing your income and expenses
Before planning for the future, you need to be aware of the present. This is why knowing your income and expenses is the first step to improving your financial life. And when we talk about knowing income and expenses, it’s not just the money that comes in and goes out. We’re talking about putting all your earnings and expenses on a single sheet of paper.
The most common method used is the famed financial spreadsheet. There are several models available on the internet and you should opt for one that suits your investor profile. Remember: a good financial spreadsheet is one that you can fill in consistently! Don’t forget to write everything down — starting with your credit card expenses, broken down by each purchase. By doing this, you’ll gain a clearer picture of the monthly budget you’re working with.
Get rid of your debts
It’s hard to talk about planning for the future if a lot of debt is tying you down to the past and present. A very important step in your financial planning is attempting to settle your debts. With this in mind, you should also figure out how much you should save if you want to pay them all off as soon as possible.
Don’t forget to consider the possibility of rescheduling debts or negotiating debts with creditors, or seeking discounts and more advantageous installment terms. Another valuable tip in this regard is to work on the debt that has the highest interest rates first. This usually refers to real estate and car financing debt.
Avoid unnecessary expenses
Having a clear vision of your income and expenses will give you the ability to avoid unnecessary expenses in your daily life. Instead of spending so much money on delivery, how about cooking at home sometimes? If going out with friends seems a bit too taxing on your wallet, a simple walk in the park followed by a movie at home may be just as entertaining. Avoiding unnecessary expenses can help you experience numerous things while also being an economically responsible move.
Save your money
Personal financial planning is not just for you to know your current financial state, and is much more important for the future. Therefore, a fundamental step in this process is learning to save your money, instead of spending everything you earn. You can start little, increasing the amount saved over the months. In a short time, you will see how big of an impact these savings can be, and they may even protect you from unforeseen circumstances.
When you complete the previous step and start saving money, you need to consider how you’re going to keep the money you’ve saved. A good path for those just starting out is to opt for simpler, fixed-income investments, which are accessible at any time and have a predictable return. A private pension is one of those beginner options, and it is worth considering even at a young age.
Monitor your financial life
Personal financial planning is constant and recurring work. This is why you should always monitor your financial situation, evaluating the information you filled in the spreadsheet. This may also help you understand whether what you’re doing is effective and if you should continue at the same pace.
Know the main mistakes of personal financial planning
As much as personal financial planning is a simple and accessible process for everyone, a lot of people make mistakes along the way. Keep an eye out for these small things and you’re bound to stay on course for your goals.
Avoid outdated information
Having a spreadsheet doesn’t necessarily solve the problems of your financial life. You need to fill in the information correctly and regularly, in order to always have updated data at hand.
Not prioritizing the payment of debts is another common mistake beginners make. You have to remember that debts will snowball if you allow them, and the longer you choose not to resolve them, the bigger they’ll get.
Lack of planning
As the Cheshire Cat from Alice in Wonderland would say: “for those who don’t know where they are going, any path will do”. Your personal financial planning will only be effective if you know what your short, medium and long-term goals are. On top of this, you’ll also want to know when and how you’re planning on achieving them.
High standard of living
Many people cannot find the balance between income and expenses and, oftentimes this is attributed to a high standard of living. Don’t forget that keeping your finances up to date requires you to be realistic about your spending. The truth is, you’ll certainly have to give up on some things if you want to improve your life. Financial planning is made of choices and waivers!
Lack of investments
Another very common mistake when planning for the future is not investing your money. The best way is to consider investments as a fixed expense and always allocate part of your income to them. This almost guarantees that you’ll have peace of mind a couple of years down the line. Remember, when we’re talking about investing, we’re not just talking about bonds or stocks. We are talking about your happiness and your dreams!