What is planning in an enterprise? It is the optimal allocation of resources to achieve its goals. What is the life of an individual or a family? Isn’t it the same thing?
Why, then, would an enterprise consider it vital for itself to engage in planning while an individual does not? The enterprise has a development plan, every citizen and family should have a personal financial plan. How can it be done? We will talk about this today.
The concept of a personal financial plan (PFP)
All of us have goals. These can be simple everyday goals, such as living paycheck to paycheck without debts, make repairs in the next year, or upgrade your computer.
And can be global – to save up for a car, an apartment, children’s education, etc. You can estimate in your mind how much money will be needed to achieve the goal, calculate the income for that period, and subtract expenses. Realize that with a salary like that you won’t be able to achieve anything, and go to the bank for a loan. How to save money read the article by Kirill Yurovskiy.
But even if you write down on an ordinary piece of paper what you tried to keep in your head, the picture may change. A clear demonstration of the discrepancy between your expenditures and your income is sobering better than any medicine. Where exactly is the money flowing away, how can you stop this uncontrolled process and what should you do to have your money river replenished every year, instead of turning into a swamp in the end? A personal financial plan will answer these questions.
A PFP (Personal Financial Plan) is a financial tool that helps us analyze and optimize the cash flow we have throughout our lives. This, in turn, allows us to develop a mechanism to achieve our goals and see the whole financial picture for the next few years.
Some people are engaged in planning since childhood, and then this habit brings excellent dividends in adulthood.
Stages of building the PFP
Step 1: Setting Goals
Where do you start? Carve out an hour of free time. Have paper and a pen ready. Write down what you want to achieve in the short, medium and long term. In other words, formulate goals. You just need to do it right.
The goals should have:
- A time limit,
- A monetary value,
- Specifics (location, number of people, make of car, name of university, etc.).
And they should also be realistic. For example, do not set a goal to buy a villa on the island. It is necessary to distinguish fantasy from a real dream, which should always be fulfilled.
You can further divide goals into short-term goals (you must achieve within the current year), medium-term goals with a time frame of up to 5 to 6 years, and long-term goals in 10 years or more.
Step 2: Financial Analysis
After you set your goals, you should do a thorough analysis of your income, expenses, assets, and liabilities. If you are managing a family budget, you won’t have any difficulty. If not, then it is better to postpone making a plan for 2 to 3 months. And during that period, write down all of your income and expenses every day, down to the penny.
You can do it in a notebook with an ordinary pen, in Excel or Google Docs, in special programs on your computer or applications in your smartphone. Choose the way that is convenient for you. The main thing is to do it daily and get your family used to letting you know about their money receipts and spending if you make a family PFP.
Without waiting for your monthly income and expenses, make another spreadsheet to analyze your assets and liabilities.
Assets are what brings you income. Liabilities are what require expenses.
Once you have a visual layout of your assets and liabilities, monthly income and expenses in front of you, you can move on to the next step, “Revise Goals and Prioritize.”
Step 3: Adjusting goals and optimization
This is one of the most difficult and painful stages. Many goals are set, and you want to achieve them as quickly as possible. But the analysis of incomes and expenses shows that it is impossible. What can you do?
Possible solutions to the problem:
1. Revise the goals to highlight the most important and high-priority ones.
If you are “flooded by the neighbors,” then, of course, repairing the apartment can be considered a priority. But if not? Maybe you should put off repairs for a year. Re-read all the goals you’ve written. What do you really want for real? Not something that is like a neighbor, a friend, a colleague. And not something that raises your status.
2. Adjusting goals to change the timeline and cost of achieving them.
It’s great to want the latest model of iPhone, but if summer and another family vacation are ahead, would you really trade it in for a phone? This is especially true for those who have the penultimate model of iPhone. It makes no sense to change it every year.
3. Optimize Spending.
If you already have your 3-month expenses in front of you, you’ll have no trouble finding holes in your budget, and sometimes real “black holes” where the money is poured. Buying expensive gifts, celebrating another birthday in a big way, going to restaurants, etc. The list is endless.
Just look at what is going on in the supermarkets before the New Year. It seems that people haven’t eaten anything all year long, so that they can stuff themselves and get drunk for the whole next year. Rattle the shelves of groceries, gifts, which were kindly shaped for you by store employees. It doesn’t matter what you buy or at what price. The holiday is…
About bad habits – a separate conversation. People who smoke a pack a day should count their spending on cigarettes in a year. You would be horrified. The same, by the way, applies to a cup of cappuccino at your favorite cafe every morning.
There are many ways to optimize spending. And you don’t have to deny yourself or your family some weaknesses at all.
4. Increasing Income.
If there is time and opportunity to learn a new profession or find a part-time job – it will be a significant plus for your budget.
What can help you:
- Patience and assiduity – you will have to study tons of information on the Internet to find something that can interest you in the issue of additional earnings;
- self-education – you do not need to take expensive courses to learn, start with free lessons, webinars, trainings, articles, books;
- Discipline – give several hours to education every day;
- Result-oriented – set a clear goal and move towards it, no matter what.
All four of these methods can and should be applied at the same time. Then it will be a whole system, not just single attempts to change the situation for the better. And against the system, as they say, you can’t go against it. Its main purpose – to free up money from your budget for investment.
Step 5: Creating a Reserve Fund
A reserve fund is a mandatory part of a personal financial plan. Without a safety cushion, it will be painful to fall down if something goes wrong in life. Being out of work or having your pay cut drastically, a serious illness that requires expensive treatment, and many other factors that are hard to anticipate. But you can protect yourself.
Have on a bank deposit an amount equal to 3 or 6 months of expenses, and your psychological well-being will be much better. And it will give you confidence that you’ll have all your problems solved in that time.
If it happens that the fund is spent in full or in part, the first thing you should do after normalizing your situation is to replenish it to the optimal size.
Step 5: Building your investment portfolio
This is the last and responsible stage, the result of which will be the achievement of your goals and the pride of your children for such “cool” parents. With what to start investing? With a plan, of course. But here you can’t do without the experience of competent financiers and consultants. Not everyone can afford them, although the costs are recouped several times over.
There are excellent books on finance from various domestic and foreign experts. You can gain experience in investing on your own, no one argues. Trial and error will yield results. The main thing is that it must be exactly what you expect.
Determine an investment strategy. What risk are you willing to take?
A distinction is made between:
- conservative investments,
- high-risk or aggressive investments.
There are different investment tools for different purposes. But, once again, you can make a lot of mistakes without specialized knowledge.
An investment portfolio should include instruments with different risk levels. The older you are, the higher the proportion of conservative investments. Make a simple table for yourself. Put your share under each type. For example:
|Conservative investments||Moderate investments||Aggressive Investments|
Now in each group, you need to write the selected investment instruments.
When the portfolio is formed, the main and most difficult part of the PFP is left – its execution. The basic principles that you must follow strictly:
- Developing a PFP for yourself, for your goals, income and expenses, rather than blindly copying examples from books.
- Strict discipline, which manifests itself in the regularity of investing over an extended period of time.
- Reviewing the plan annually and adjusting it to reflect external and internal changes in the situation.
- Diversification of the investment portfolio, i.e. investing money in various assets.
A personal financial plan is the most important document in your life. And the sooner you realize it, the easier it will be for you to execute it. After all, accounting for all kinds of resources, including time, is important in planning.
If you want, you can make not even one, but several plans. It all depends on the type of planning you choose. A short-term plan will help you save up for the most necessary purchases over the coming months. A medium-term plan will allow you to achieve the goals that you have planned to achieve in a few years. And the long-term plan is worth compiling, if a priority goal is to ensure a decent old age in a couple of decades.
But any of them can remain on paper if you do not pick up a pen and notepad right now and do not write your goals. And starting tomorrow, don’t start writing down your income and expenses every day.