can think about financial plan as the itinerary for a trip. He knows where he wants to go and he wants to find the best way to get there, without surprises or detours. So, if the goal is to have your personal finances under control, you have to find a way to make paying the bills not a headache.
Remember that there is no financial plan that escapes this rule: income must exceed expenses. And when that doesn’t happen, you have to redo the math, change habits, consumption decisions and make the necessary adjustments.
Let’s look at some tips for drawing up your financial plan.
The basis of the financial plan: the budget
When talking about a financial plan, nothing is done without knowing precisely how much you earn and what expenses you have. In other words, to control your finances, you first need to create a budget.
Sound easy? Do you know exactly what your salary is? Can you accurately describe how much you spend per month? Most likely you have a rough idea. But in order for your finances to remain under control, it is important to know, almost to the cent, the value of expenses and income.
You can use pen and paper, a spreadsheet on your computer, an application on your mobile phone or any other method that is more convenient for you. The only requirement is that the format allows you to record different months and then compare them with each other.
What should be in the budget
In any case, always take into account all expenses, even the most insignificant ones. And don’t forget those expenses that don’t occur every month, like paying taxes or insurance that are billed once or twice a year.
When making a budget and seeing the relationship between income and expenses, it is easy to see if you are spending more than you should. But you also realize how much you will have to save to rebalance the accounts.
Thus, it is equally important to know how much you spend in each category of expenses (housing, food, transport, leisure) and to assess whether any of these expenses can be reduced. This management is essential for the financial plan to be successful.
Creating goals – which can go, for example, by cutting 10% in all expenses – helps you understand which way to go to get there.
Savings: a fundamental pillar of your finances
Even if the budget is balanced, you should not neglect savings. And if you are, then it is even advisable to start making some cuts in your expenses.
Renegotiating service contracts (telecommunications, electricity, gas), reducing superfluous expenses and finding alternative forms of income can give you some leeway to start building your nest egg.
When establishing the financial plan, think of these readjustments as something temporary, but which may become permanent. That is, when the budget improves, don’t fall into the temptation of spending too much again.
The importance of setting savings goals
When drawing up your financial plan, it is advisable to set realistic goals for savings. That is, don’t want to save half of your salary if your salary is barely enough to pay essential expenses. But that doesn’t mean you can’t save, even if it’s just one euro a day.
Choose the savings formula that best suits your needs and focus on your goals. In the end, the most important thing is that savings are part of your financial plan.
And to “feed” an emergency fund
It is another important step in building a financial plan. An emergency fund is a financial cushion you can turn to in case an unforeseen event arises: unemployment, for example.
The value of this fund must correspond to at least three months of current expenses, although the ideal is six months.
For example, if you have monthly expenses in the order of 800 euros, the emergency fund must be that amount multiplied by six, that is, 4,800 euros.
pay the debts
When establishing a financial plan, try to start from a solid base and as “clean” as possible. That is, don’t make savings or investment plans without simplifying your financial life, freeing it from everything that might impede your evolution.
If you have debts related to credit cards, taxes or even debts to friends and family, make paying those debts a priority. Obviously, in the case of a home loan, it is impossible to pay off the debt quickly, but there are other situations in which you can do so.
Don’t let bills accumulate, pay as much as you can, resorting, if necessary, to payment plans negotiated with creditors. Debts do not disappear, on the contrary, they tend to accumulate in a snowball effect.
So, when creating your financial plan, define strategies to pay off the smallest debts and, if you can, to amortize the larger ones, such as a personal loan.
What you should never do is let it accumulate or even worsen your effort rate, incurring new debts.
Invest and diversify: put your money to work for you
A good financial plan does not only include savings, but also provides for the possibility of investment. And this does not mean that you have to have thousands of euros to buy real estate or to invest in financial products.
When it comes to investing, the first thing to know is the rules of the game. Where are you putting your money? What are the risks and possible benefits? What is yours investor profile?
Another essential rule is not to invest money in a single financial application, that is, not to put all your eggs in one basket. Having a diversified wealth means that your investments are less vulnerable to market fluctuations and therefore more financially protected.
Final note: the financial plan is not static
You should also take into account that a financial plan must be flexible and that the goals you set today may be out of step at the end of the year.
So don’t plan too rigidly, leaving room for changes or even backtracking if necessary. As in the itinerary of a trip, sometimes obstacles or more favorable conditions arise to reach your destination.
Article originally published May 2021. Updated November 2022.