When it comes to managing your personal finances, thinking about a long-term strategy is paramount. Predicting what the future holds is difficult: this is why having a plan can give a big hand, especially when our money and the safety of our savings are at stake.
While it may sound complicated, we’re here to help. There are tons of tips and tricks that can help you streamline the financial planning process in just a few simple steps. In this article, we give you some tips on how to create a savings plan that will help you reach your financial goals during the different stages of your life.
What is personal financial planning?
First, let’s start with the basics. What is Personal Finance Planning?
- It is a detailed plan that takes several years into the future into consideration.
- It is not reserved for those with a lot of money aside, but it is valid for everyone.
- A financial plan helps you cope with life’s surprises.
- It includes detailed information on income, savings, investments, expenses, debts and insurance policies.
- It helps you when it comes to paying off any debts and saving for a mortgage, emergency fund, or retirement .
What are the steps to follow for personal financial planning?
Creating a financial plan takes some time, but rest assured it’s worth it. Below we offer you our 3-point guide:
1. Set your goals
The first step towards creating a personal financial plan is often the hardest. You will have to ask yourself important questions like “where do you see yourself in five, ten, or thirty years?”. This will invite you to reflect on what you value in life. One of the best ways to address these big questions is to think about what kind of life you would like to have in the future , without dwelling too much on the details.
Maybe imagine buying a house, having children, paying for their education, and finally retiring without financial worries. Or maybe you prefer the idea of traveling around the world, not having children or retiring early? Whatever lifestyle you choose, it will have an impact on your personal financial plan , as it will play a key role in achieving your goals.
Under the 50/30/20 rule, it’s advisable to allocate 20% of your after-tax income to your savings . But when you have several long-term goals, figuring out how to split this sum isn’t so obvious. Do you want to allocate 15% to the pension and 5% to the emergency fund? Or do you prefer to save for each goal in a systematic way? In these cases, the trick is to define your priorities – and this brings us to the next step.
2. Define your priorities
Now that you have a general idea of the lifestyle you would like to have over the next thirty years, it is important to sort your savings goals according to your priorities , so that they actually match your plan. For example, if you want to start saving for a mortgage, future children and retirement, your priorities might be these:
- Saving to pay the down payment for a house
- Save money to ensure financial support for your children
- Save for retirement
Clearly, some of these priorities may overlap . You could pay your pension and at the same time put money aside for a fund for your children; but since your children are likely to need your support before you retire, setting your priorities becomes necessary. If we take the example of retiring early and traveling the world, you could prioritize the following goals in your personal financial plan:
- Save for early retirement
- Start saving money for your next trips
Since setting aside money for early retirement is quite substantial, it’s best to start doing it as soon as possible . In this case, you can start saving for your travels around the world as soon as you have put aside the money for your early retirement.
If you are not sure that you will be able to save for your retirement at 20 or 30, look at it this way: let’s say you are 30 years old and earn € 40,000 gross a year. If in the next 35 years (and therefore until you turn 65) you set aside 8% of your income, you can count on a pension fund worth about € 157,000 . This figure takes into account the yield, an inflation rate of 2% and a fund return of 6%.
3. Establish a budget
Once you have an idea of your next goals, it is important to keep an eye on your current financial situation . Planning your personal finances requires you to create a budget based on all your income and expenses, so that you can distinguish necessary expenses from desires. Here’s how you can budget:
- Record all your income and expenses for a period of 30 days.
- Group all your expenses and divide them into variable and fixed costs . Fixed costs are those costs that recur every month, such as rent, car insurance, or electricity and gas bills. Variable costs, on the other hand, can vary during the month, and include, for example, shopping at the supermarket, going out with friends or the hairdresser.
- Estimate your variable costs and identify areas where you could make cuts.
- Define a portion of your variable costs that you can allocate each month to your savings fund. In this case, the 50/30/20 rule could prove to be a valuable tool. The idea is to allocate 50% of your income to fixed costs, 30% to variable costs and 20% to savings funds.
- Review your budget every month and make adjustments if necessary. You certainly won’t be able to set aside the same amount every month. Rather than being discouraged by losing sight of your goals for a moment, learn to accept that these ups and downs are part of the personal finance planning process.
How to do a personal financial planning
Now that you have a clear idea of your goals and the tools you need to manage your budget, you can start thinking about the next steps in the financial planning process. A bit like when you set your priorities thinking about your financial goals, personal finance planning is based on a series of criteria that you must comply with before you start saving for your set goals : for example, paying off debts, putting in money from go to an emergency fund and make sure you have adequate insurance coverage.
1. Pay off any debts
Before you start saving for your mortgage or early retirement, it’s important to settle any outstanding debts , especially those with high interest rates, such as those on a high-interest loan. By paying high amounts just to meet the interest, you will end up significantly reducing the monthly sum to be allocated to your savings project. If nothing else, try to pay off at least the minimum required amount each month to avoid further debt.
2. Set aside money for an emergency fund
An emergency fund protects you from the unexpected in life . Just like a financial safety net that helps you keep track of your savings goals, an emergency fund should be used to cope with a crisis, for example if:
- You suddenly lose your job and therefore your main source of income
- You need to move to take care of a sick family member
- There is a sudden recession or a global crisis
At best, your emergency fund should equal the sum of your fixed costs over 3-6 months (rent, electricity and water, car insurance, etc.), but you can also choose to include your variable costs (spending , go out with friends, gym membership). Consider, for example, that if you work as a freelancer or live in a single-member household, your financial situation could potentially be more vulnerable than that of someone with an employment contract or living as a couple. For this reason, it might be a good idea to save to cover 6 months rather than 3. This way, you have a safety net to help you get back on your feet.
3. Make sure you have good insurance coverage
Just as an emergency fund protects you from unpleasant surprises, insurance protects you from sizable costs that could significantly harm your personal financial planning goals. Preparing properly for the unexpected can save you a lot of money in the future, as well as give you more confidence.
For example, if your apartment gets flooded and you don’t have home insurance, or you are involved in a car accident and your car is not insured, you risk having to pay large sums of money which, in some cases, take years to complete welded. Being able to count on an emergency fund and good insurance coverage, therefore, means being able to meet your savings goals, even when things get difficult.
Save for retirement
Now that you’ve laid the groundwork for a financial safety net with an emergency fund and adequate insurance, you can start saving for your long-term financial goals. One of them is saving for retirement: while it may seem like a long way off, it is good to start doing it as soon as possible .
The sooner you start saving, the more you can take advantage of the compound interest found in many pension funds. We talk about compound interest when the accumulated interest from your savings begins to accrue. For instance:
- Every year, for five years, you pay € 2,000 into a pension fund with an interest rate of 5%.
- After the first year you will have accumulated € 2,000 plus 5% of € 2,000, equal to € 100. So, the first year you will have earned € 2,100.
- After setting aside another € 2,000 in the second year, you will have accumulated € 4,100 plus 5% of € 4,100, equal to € 105. So, by the end of the second year you will have earned € 4,205.
- When your interest begins to produce interest in a progressive way, after five years you will have earned € 11,172, of which € 1,172 coming from compound interest.
Remember that some pension funds also provide tax deductions, making saving even easier!
Personal financial planning tools
You can manage financial planning on your own, or get help to create your plan and track it over the years. Here are 5 examples of personal financial planning tools:
- Portfolio management services
- Holistic financial planning and investment advice
- Online financial planning services
- Financial planning software and apps
- Financial advisors