When we talk about saving and investing, what’s the first thing that comes to your mind? Investing for the future, or investing for the present? Well, whatever you might think, none of these ideas are wrong, as it’s important to keep a balance between both.
Planning for the short and long term is essential to have a healthy financial life. When it comes to investing, many people want immediate results. And honestly, that’s nothing wrong with that.
We’ve all heard stories about overnight millionaires, and thinking that something like that can happen to you can be somewhat alluring. However, long-term investments, made with well thought and responsible actions in the present, can guarantee you a stable financial future.
Keep reading and we’ll show you how to achieve exactly that!
Short and long term: investing for the future or focusing on the present?
At times, financial planning can be challenging. Balancing short and long term goals may not always be easy.
A lot of people live like there’s no tomorrow, don’t have an organized budget, and buy everything they can get their hands on. Others, on the other hand, only think about the future which can ultimately have a negative impact on the present.
Achieving the balance between the present and future is essential, as it allows us to enjoy everyday life while also preparing for future events such as retirement. Focusing solely on the future or the present is something that you should avoid at all costs!
Naturally, to achieve your financial goals, you’ll have to give up some things, but it doesn’t have to be everything. That’s why you should learn how to prioritize.
Saving a portion of your salary to start investing might be a good starting point. But, don’t let that investment burden your short and long term plans.
Why balance finances for the short and long term?
Spending 15 years of your life only thinking about the present might cost you a lot. You could end up with no financial reserve, your financial freedom in the future might look like something you wouldn’t boast about, and in the end line – your family might suffer.
On the other hand, living in the future might get you to the point where you’ll start asking yourself – was it worth it? Solely focusing on the future can cause you to miss out on important aspects of life such as leisure time, socializing, and family. All this can have a detrimental effect on emotional well-being.
Treat yourself! It doesn’t have to be big. A concert, cinema, or even travel. Small things make life more beautiful, and responsible spending in the present, in addition to bringing you satisfaction, can potentially contribute to making smarter decisions for the future.
Regarding future planning, you need to focus on one thing: having definite goals. By doing this, it will be easier to organize your personal finances, because you know where you want to go and how to do it.
Now let’s talk about some practical tips to help you balance the present and future in your finances!
How to make financial planning to balance short and long term?
To get the best results, you need to make a plan that works for you. Not everyone has the same wants and needs, so there isn’t just one plan that works for everyone.
Theories of the three pots
Here, we talk about the 3 pot theory, where each pot represents a cash vault. It’s a simple way for you to organize your budget!
Pot 1 represents your present.
Pot 1 is for daily expenses, like bills and entertainment. It’s easy to access and comes from things like your salary. You use this pot most often, for everyday expenses such as buying food, transportation costs, and paying utilities.
Now let’s talk about pot 3! (Yeah, we know! We’ll skip pot 2 for now. But no worries, we’ll come back to it)
Pot 3 is your future pot. It is made for long-term investments that are riskier but have the potential for high returns. You would put your investments, stocks, and real estate in this one. If you’re into collectibles, you would want to put them into this pot as well.
Finally, there’s pot 2!
This pot is created to balance out the other two pots and stands somewhere between your present and future. Pot 2 contains investments that are safe and will help you sleep well at night. You might ask what those investments exactly are? Well, your retirement, elderly care, and even school fees might be some.
Tips for organizing the budget
– Make a spreadsheet with your expenses and income: This will help you analyze your financial situation, know where your money goes and how much you can spend each month.
– Write down all expenses: Put all your expenses into a spreadsheet, no matter if they are fixed or variable. Be careful to write down ALL of the expenses, as we tend to get lazy with writing down small expenses like buying a dollar-slice pizza. However, these can add up rapidly and may shock you!
– Divide your salary: Before spending, divide your salary. One of the most popular methods is called 50-30-20, meaning that 50% of your salary should go for fixed expenses, 30% for variable expenses, and 20% for saving and investing.
– Have goals: Take it one step at a time. Smaller goals are a good way to reach bigger goals. For example, eating out less often might be healthier for you, and you might save enough for that dream travel you’ve been thinking about for a long time!
– Have an emergency reserve: No matter how organized you are, there are things that are beyond your control. Unfortunately, things like car repairs, home repairs, medical bills, and similar are the most common culprits of why so many people end up in debt.
– Gather money and invest: Saving money just won’t do it. Especially if you take inflation and recession into account. The perfect formula might be – to save to invest.