Personal Finances: Tips for a Peaceful Future
Taking control of your finances is the best way to safeguard your finances in the future. Read on and find out why.
In times of economic hardship, many of us worry about what the future holds and how it will affect our financial situation. That’s why it’s more important than ever that you map out a long-term strategy for your money and the security of your savings.
While it may seem a bit overwhelming, we’re here to lend a hand: many tips and tricks can help you break down financial planning into small steps to make the process easier. Here’s how to make a savings plan that will help you reach your goals during the different stages of your life.
What is a personal finance plan?
- It’s a comprehensive plan that looks several years into the future.
- With a financial plan, you’ll stop worrying about those surprises in life.
- It includes your income, savings, investments, expenses, debts, and insurance details.
- It helps you pay off debt and save for a mortgage, an emergency fund, and retirement.
What are the stages of a personal finance plan?
Creating a financial plan takes time, but it’s worth it. Here’s a step-by-step guide:
- Set your goals for your financial plan.
The first step in creating your financial plan can be the most difficult. It requires you to ask yourself the most important questions, such as where you see yourself in five, ten, and thirty years. It requires you to ask yourself what you place the most important in life. One of the best ways to approach these big questions is to ask yourself what kind of life you would like to live in the future without dwelling too much on specifics.
Maybe you’re thinking about buying a home, having children, putting them through college, and, ultimately, retiring without financial worries. Or perhaps you’d instead focus on getting rid of debt, not having children, and retiring early. Whichever lifestyle appeals to you most will influence your financial plan, as it aims to help you achieve your goals.
As a general rule, if we go by the 50/30/20 rule, you have to save 20% of your after-tax income. But when you have several long-term goals, it can be tricky to know how to divide this figure: should you put 15% in your retirement fund and 5% in your emergency fund, or should you save for each goal systematically? The trick is to prioritize your dreams, which brings us to the next step.
- Prioritize your goals
Now that you have an idea of the kind of life you want to build over the next thirty years, it’s essential to prioritize your savings goals to fit the different stages of your life. If we take as an example saving for a future with a mortgage, children, and retirement, your priorities might be:
- Saving for a down payment on a home
- Saving to finance your children’s lives
- Saving for retirement
Of course, some of these priorities may overlap. You can set aside money for your retirement while saving for your children’s trust funds, but since funding your children’s lives will likely precede your retirement, it should be prioritized. However, if we take getting rid of debt and retiring early as an example, your finances will be ordered as follows:
- Save to pay off debts.
- Starting to save for early retirement
- Saving to travel the world
Since saving for an early retirement requires a lot of money, it is best to start saving as soon as possible. In this example, you can start saving for your early retirement as soon as you have paid off your debts. But once you have amassed a considerable amount in your pension fund, even if you continue to contribute recurring amounts, you can start saving for the world travel you will enjoy in retirement.
If you don’t know whether you should start saving for retirement in your twenties or thirties, consider the following. Let’s say you are 30 years old and earn 40,000 euros a year before taxes. If you set aside 8% of your income for your pension plan over the next 35 years, you will have a pension fund of about 157,000 euros when you turn 65. 157,000. This figure considers the maintenance fee, a 2% inflation rate, and a fund yield of 6%.
- Create a budget
Once you have decided where your life is headed, it is essential to analyze your current financial situation thoroughly. Planning your finances requires you to create a budget based on all your income and expenses to assess the need for your fixed expenses. Here’s how to make a budget:
Write down all your income and expenses for 30 days.
Divide your expenses into a variable and fixed. Fixed expenses are unchanging expenses, such as rent, car insurance, electricity, and gas bills. Variable expenses are your flexible expenses, for example, the money you spend at the grocery store, on a night out, and at the hairdresser.
Evaluate your variable expenses and think about how you can reduce them. Consider using a personal finance app to facilitate this process.
Set a certain amount of your variable expenses that you can set aside and put it into your savings fund each month. Sticking to an approach such as the 50/30/20 rule can be helpful. The idea is to allocate 50% of your income to your fixed expenses, 30% to your variable costs, and 20% to your savings fund.
Review your budget every month and adjust it when necessary. The amount you can afford to save each month is sure to change. Instead of getting discouraged about straying from your budget goals for a short period, accept these ups and downs as part of the financial planning process. If you have a lot of forced spending, think about how you can save and use your money wisely. If you have a child in college, you can show them platforms where you can find 100% free essays. That’s a great way to save money on tuition. There are many such examples, so we recommend you think about optimizing your expenses.
Save for an emergency fund
An emergency fund serves to protect you against unexpected life events. An emergency fund is like a financial safety net that cushions you from straying from your savings goals. It should be used when a crisis arises, such as, for example:
- Losing your job and, therefore, your primary source of income.
- Having to relocate to care for a sick relative
- A sudden global recession or crisis
Ideally, it should include three to six months of fixed expenses (rent, electricity and water, car insurance), but you can also have your variable costs (supermarket, leisure, gym). Keep in mind that if you are self-employed or live in a single-person household, your financial situation may be more vulnerable than someone who has a regular job or someone who shares living costs with someone else. Therefore, it would be a good idea to save six months instead of three to make sure you have a good cushion to help you support yourself.
Make sure you have the necessary insurance
Just as an emergency fund protects you against surprises, insurance protects you against paying out significant expenses that can hinder your financial planning goals. Preparing for the unexpected can save you a lot of money in the long run, as well as give you a higher level of day-to-day security.
For example, let’s say your apartment floods, you don’t have home insurance, or you have a traffic accident, and you don’t have car insurance. These situations will force you to invest large amounts of money that will take years to recover. That’s why having an emergency fund and taking out the necessary insurance will help you maintain your savings goals, even if things get tough.
Save for retirement
Once you’ve created your financial safety net with an emergency fund and the necessary insurance, you can start saving for long-term financial goals. A widespread, long-term goal is to save for retirement; even though it may seem like a long way off, it’s best to start saving for it as soon as possible.
The sooner you start saving, the more you’ll benefit from the compound interest offered by many retirement savings accounts. Compound interest is applied when the interest your savings have accumulated starts earning interest on its own.
It’s worth noting that, in some cases, there are specific retirement savings accounts that also allow tax deductions, making it a little easier for you to save a little more!
Tools for planning your financial:
You can organize your finances independently, or you can ask for help to create a plan and track it over the years. Here are some examples of personal finance tools:
- Portfolio management services.
- Holistic planning and investment advice
- Online financial planning services
- Financial planning apps and software
- Financial advisors
We wish you a great financial future and hope you find our advice helpful.