Tag: Personal financial planning

Thinking ahead is one of the most important principles of personal finance. In this article, I am going to explain to you how you can organize yourself to have capital and complementary income tomorrow. I will focus primarily on retirement, but personal financial planning also helps you buy your dream home or have money saved for quirks and emergencies. What is personal financial planning? The term financial planning generally refers to the business world, specifically the ongoing process of determining how a business will be able to achieve its strategic goals and objectives. A financial plan describes each of the activities, resources, equipment, and materials that are needed to achieve these goals, as well as the timelines involved. It is updated regularly. For individuals, the concept is similar. The definition of personal financial planning is the action of analyzing the current financial situation, defining clear and realistic financial objectives, and establishing the necessary strategies to achieve those objectives. Again, this is an ongoing process, updated regularly. A very simple example would be if I want to buy a computer that costs € 1,200 but I don't have any money. After analyzing my situation, I conclude that I can save € 200 per month for 6 months. To make sure I do, I schedule an automatic transfer for that amount. This is an example of short-term financial planning. For bigger goals, like buying a home or preparing for retirement, it takes more analysis and more work. Before planning, analyze your financial situation If you want to know the best route to go from one point to another, first you need to know your starting point. In the case of personal finances, it is essential to review your current situation. You have to review on the one hand your income and expenses and on the other hand your financial situation. How much do you earn and how much do you spend? Knowing how much you earn each month, or each year is usually something quite easy to determine, especially if you work for someone else. Be careful to list all your income, including extra payments, rental income, or the like. Determining expenses requires more work. It is advisable to make an effort to write down all your monthly expenses. If you pay a lot by card or direct debit, it will be easier for you. If you use cash, I recommend that you write down each purchase for three months, so that you have a more general vision. Put your average monthly expense for each item. For expenses that vary a lot, such as your electricity bill, make a monthly average of your annual expenses. And don't forget about bills you pay only once a year, like some insurance or taxes. Identifying your income and expenses allows you to know your monthly savings capacity. If at that point, you find that you spend more than you put in, then you will have to take action immediately. And if your saving capacity is low, there are also many ways to increase it. It is a topic that I have covered a lot on the blog. What is your financial situation? You can have assets, liabilities, or both. But you must compile everything. Your assets can be bank account balances, deposits, funds, stocks, bonds, real estate, vehicles, jewelry, and other assets. For each of these, indicate the current market value. Your liabilities are debts, such as outstanding mortgage balance, personal loans, credit card balance, debts with family and friends, etc. The difference between assets and liabilities is the net worth. As an example, we can imagine a family that has a flat valued at € 150,000, a bank account balance of € 10,000, a pension fund of € 20,000, a car valued at € 15,000, and € 5,000 on the stock market. Total assets: € 200,000. That same family still has € 80,000 to pay on the mortgage, € 5,000 pending on the car loan, € 10,000 to return to the family, and € 2,000 in credit card balance. Total liabilities: € 97,000. His net worth is € 103,000. Some people have a negative net worth, meaning more debt than assets, and they need to take action immediately. And for others, the objective is to increase their net worth, to have more resources in the future. I have to add that, in my opinion, it is advisable to avoid personal loans, credit card lines, and credit in general. The only exception I see is financing a house with a mortgage, but not in any condition. Define the goals of your financial planning We already know the starting point, now it remains to know where you want to go. And to determine this, you need to define your long-term financial goals. We are going to talk about three very common goals: retirement, buying a home, and financing children's education. Financial planning and retirement How much income do you want to have when you retire? After half a life of hard work, of course, we all want to be able to enjoy a comfortable rest. That is why you must ask yourself how much money you think you could spend on your retirement with a standard of living according to your needs and desires. You will have to save for it. If you want to know how much you have to save per month to live your golden retirement, I invite you to use that personalized calculator that the financial experts at Inversimply.com have prepared. You will only have to indicate how much money you want to collect, how much time is left for your retirement, and your investor profile. Why do you have to plan your finances for your retirement? If you have followed the economic news, you know that the public pension system faces many challenges. There are more and more pensioners and the ratio of workers to retirees decreases year after year. As if that were not enough, the average pension has risen a lot in recent years, because new retirees charge much more than old ones. As reducing current pensions is not a politically viable option, the strategy of successive governments is twofold. On the one hand, they make the contributions of current workers more expensive, generally by extending the necessary contribution time. On the other hand, they lower future benefits, tightening the conditions to collect a full pension. Current demographic trends raise concerns that the public pensions of current workers will be significantly lower than those charged by current retirees. For this reason, it makes perfect sense to consider additional income to complete that public retirement. What financial planning strategy to adopt? You have to work on two axes: Increase your monthly savings capacity. That generally means optimizing your expenses by cutting back on what is not necessary. But it can also involve looking for additional income, like some that I have cited on the blog. Invest what you save. When you reason over the long term, the added interest on investments snowballs, allowing you to increase your wealth much more than what you save month after month. Each person has a risk profile, and you can choose what type of investments are right for you. Remember that there is a correlation between risk and return. Imagine a person who saves € 1,000 per month for 20 years. If you don't invest it, in the end, you will have € 240,000. If, on the contrary, you invest it with an average annual return of 6%, after 20 years you will have almost double, € 468,000. This is why investing is so important. Personal financial planning to buy a home Buying a house is a priority for the vast majority of Spanish households. The problem, in my opinion, is that that purchase is almost always made without proper thought and planning. Some people still think, today, that renting is a waste of money. Others, frightened by the previous housing bubble, think that buying is a mistake. The truth is that there is no single answer. The best home decision depends on several factors, including the market value of the home, the rental price, interest rates, and the financial condition of the buyers. What are the criteria for asking for a reasonable mortgage? Has money saved for the entrance, at least 20% of the purchase price? Request a mortgage term between 15 and 20 years, which is the ideal term to enjoy a good reduction in the monthly payment without paying too much interest. Have a low and fixed interest rate, to avoid bad surprises. That the mortgage letter does not exceed 35% of the household income. And, to find out if you can afford to buy a house, you should use this simple trick. Compare your home's value to your annual net household income. If the house exceeds 4 years of net income, then you would have to think very well. For example, suppose the case of a couple with an annual net income of € 35,000. That couple should analyze very well any purchase above € 140,000. It depends on whether they have savings or not, but it is an interesting filter to compare the value of the real estate market with the standard of living. How to organize your finances to buy a home? Again, the solution is savings and investment. But, as we normally seek to get the money for entry, we are talking about a much shorter term than in the case of retirement. Therefore, the investment approach is different. First, in the short term, the added interests do not influence as much. And second, it is not advisable to invest in markets with a lot of volatility if the money is going to be needed in the short term. If I buy shares for my retirement, I do not care if they may be devalued for two or three years, I have time for the market to recover. But, if I need the money for the entrance, I cannot allow myself those variations. So it is usually more interesting to invest in deposits and other safer instruments. Other vital objectives: children's education, weddings, travel ... If you want to have the capital to pay for your children's university education, possible weddings, or have money for whims or trips, it is also necessary to do a minimum of personal financial planning. Analyze and cut your expenses, as we already explained in the article on the family budget. Increase your income, ask for a raise, change jobs, or find extra income. Invest your savings to get more out of them. Are you going to get serious about financial planning for your economy? Glad to hear it! If you are concerned about retirement, do not hesitate to review the Inversimply tool that I mentioned before. And to save and invest, you have many articles on the blog.

Tag: Personal financial planning

How to Organize Your Personal Financial Planning for the Future

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