For true financial security, it’s not enough to just keep track of your income and expenses. To stop living paycheck to paycheck and protect your family from economic turbulence, you need routine proactive planning. In a sense, you need it precisely so that you don’t have to drastically change your habits in times of crisis. Here are simple steps to help plan things out.
Forming a Budget for the Month
Before you make your way, you need to understand where you are. So let’s start with an audit of your actual income and expenses. The more fluctuating your budget from month to month, the longer period you need to cover – say, a year.
It’s worth considering all sources of income, including one-time: salary, bonuses, freelancing, income from renting an apartment, the sale of old things and interest on deposits. The same should be done with expenditures. It is important to analyze everything, even the “little things”: expenses for transportation, cabs and couriers, gifts to colleagues, daycare for a child or any subscriptions. Banking apps show expenses by category. The cash portion can be broken down at least by memory, but the more detailed the better.
Then you need to divide the expenses in each category by the number of months in the analysis to get the average amounts per category – this will be the basis for budgeting. Expenses that are easy to cut will catch your eye on their own. If they are not yet so obvious, you can make two tables: in one, arrange the expense categories in descending order of importance, and in the other, in descending order of size. Then you compare the tables line by line: some expenses are at the bottom in the first table, and some are at the top in the second one. Most likely, these are the lines that hide your future realized financial goals. This approach is not a rigorous analysis, but it allows you to see what’s eating into your budget.
It’s also important to consider whether you can painlessly reduce mandatory spending, such as getting discount cards at your favorite stores, or using cards with higher cashback in different categories.
All of this will allow you to form a budget for the month. In addition to income and expenses, it will include the amount you save each month. Staying on budget is the first and easiest financial goal.
Working on Basic Financial Security
Understanding your family’s cash flow structure gives you control over your budget in the present. And the money left over can be set aside for the future. But it also requires awareness – clear financial goals.
A financial goal should be specific, measurable, attainable, meaningful, and time-bound. “I want to set aside $100 for gambling at CasinoChan in 1 month” is a good financial goal. And “I want to get rich” is an understandable desire, but it cannot be called a financial objective.
It’s customary to divide goals into short-term, medium-term, and long-term goals. It’s better to start with the first ones: achieving short-term goals will give confidence and motivation to implement a long-term strategy.
Short-term goals are anything that can be achieved within a few months. The most important ones are to create a safety cushion and close out small loans and credit cards. Experts disagree on the order of priority: on the one hand, interest on loans devalues any savings, which means that they should be closed first. On the other hand, if a family doesn’t have a statutory fund, any unforeseen circumstance – illness or loss of employment – will drive it deeper into debt. Everyone decides for himself what is more important for him, but both goals are urgent.
Setting Medium-term Goals
In the medium term, you need to continue to strengthen your financial security. But now that you’re done with debt and your rainy-day stash gives you confidence in the face of external circumstances, you can think about your dreams.
Medium-term goals are the goals for the next 1-5 years. These can include, for example, home renovations, making a down payment on a mortgage, education abroad, or buying a new car.
At this stage, it’s worth including investing in the stock market in your financial strategy. The modern approach to investing says that the composition of the portfolio should not be dictated by the maximum yield, but primarily by the investor’s specific life and financial goals. It’s one thing to have a goal, whether to buy real estate or retire, a year or two away. It’s quite another to have a 30-year planning horizon.
Planning for Retirement
The most important long-term financial goal and the culmination of the entire financial planning process is building retirement savings. Advisors advise investing 10-15% of all income in a long-term retirement portfolio.