The best tips to organize your personal finances in the long term

In times of economic hardship, many of us worry about what the future holds and how it will affect our financial situation. For this reason, it is more important than ever that you draw up a long-term strategy for your money and the security of your savings.

Although it may seem a bit overwhelming, we’re here to help you out – there are plenty of tips and tricks that can help you break down financial planning into small steps to make the process easier for you . Below, we explain how to make a savings plan that will help you achieve your goals during the different stages of your life.

What are personal finances?

First things first: let’s start with the basics. What exactly does that mean personal finance?

  • It is a comprehensive plan that looks several years into the future.
  • It is not only intended for those who have a lot of money.
  • With a financial plan you will stop worrying about those unexpected surprises in life.
  • It includes details about your income, savings, investments, expenses, debts, and insurance.
  • It helps you pay off debt and save for a mortgage , an emergency fund and your retirement.

What are the stages of a personal finance plan?

Creating a financial plan takes time, but it’s worth it. Here is a step by step guide:

1. Set your goals for your personal finance plan

The first step in creating your personal finance plan can be the most difficult. It requires you to ask yourself the biggest questions, like where do you see yourself five, ten, and thirty years from now . It requires you to consider what you give more importance to in life. One of the best ways to tackle these big questions is to ask yourself what kind of life you would like to live in the future , without dwelling too much on the specifics.

You may be thinking about buying a home, having children, paying for college, and finally retiring without financial worries. Or perhaps you’d rather focus on getting out of debt, not having children, and retiring early. Whichever lifestyle appeals to you the most will influence your personal finance plan as its goal is to help you achieve your goals.

As a general rule, based on the 50/30/20 rule, you need to save 20% of your after-tax income . But when you have multiple long-term goals, it can be hard to know how to divide this number. Should you put 15% into your retirement fund and 5% into your emergency fund? Or better save for each goal systematically? The trick is to prioritize your goals, and this brings us to the next step.

2. 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 important 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 may be:

  • Saving for a house down payment
  • Save to finance your children’s lives
  • save 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 financing the life of your children will surely be prior to your retirement, it must be prioritized. However, if we take getting rid of debt and retiring early as an example, your personal finances will be ordered as follows:

  • Save to pay off debts
  • Start saving for early retirement
  • Save to travel around the world

Because saving for early retirement requires a lot of money, it’s best to start saving as soon as possible . In this example, as soon as you have paid off your debts, you can start saving for your early retirement. But when you have amassed a considerable amount in your pension fund, even if you continue to contribute recurring amounts, you can start saving for the trips around the world that you will enjoy in retirement.

If you don’t know if you should start saving for your retirement in your 20s or 30s, consider the following . Let’s say you are 30 years old and earn 40,000 euros per year before taxes. If you set aside 8% of your income for your pension plan over the next 35 years, when you turn 65 you will have a pension fund of about 157,000 euros . This figure takes into account the maintenance fee, a 2% inflation rate and a 6% fund yield.

3. Create a budget

When you’ve decided where your life is headed, it’s important to take a hard look at your current financial situation . Planning your personal 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 create a budget:

  • Write down all your income and expenses for a 30-day period.
  • Divide your expenses into variable and fixed. Fixed expenses are things that don’t change, like rent, car insurance, or electricity and gas bills. Variable expenses are your flexible expenses, such as money you spend grocery shopping, going out at night, and getting your hair done.
  • Evaluate your variable expenses and think about how you can reduce them. Consider using a personal finance app to make this process easier.
  • Establish a certain amount of your variable expenses that you can set aside and allocate it to your savings fund each month . Sticking to an approach like the 50/30/20 rule can help. The idea is to allocate 50% of your income to your fixed expenses, 30% to your variable expenses and 20% to your savings fund.
  • Review your budget each month and adjust it when necessary. Sure, the amount you can afford to save each month changes. Instead of getting discouraged for missing your budget goals for a short period of time, accept these ups and downs as part of the financial planning process.

How to improve the planning of your personal finances

Once you are very clear about your goals and understand your budget perfectly, we can move on to the next step in the process. In the same way that you have created your priorities by visualizing your financial goals, financial planning has a series of requirements that you have to meet before you start saving for your lifetime financial goals . These include paying off debt, saving for an emergency fund, and making sure you have the necessary insurance.

1. Pay off your debts

Before you start saving for things like a mortgage or early retirement, it’s important to pay off any outstanding debt , especially those with high interest rates, such as a credit card or high-interest rate loan. If you spend so much money each month on interest alone, you severely limit the amount you can save. If you have no alternative, try to pay at least the mandatory minimum amount each month to avoid increasing your debts.

2. Save for an emergency fund

An emergency fund is there to protect you against those unexpected events in life . An emergency fund is like a financial safety net that cushions you so you don’t stray from your savings goals. It should be used when a crisis occurs, such as:

  • Losing your job and therefore your main source of income
  • Having to relocate to care for a sick relative
  • A sudden global recession or crisis

Ideally, it should include between three and six months of fixed expenses (rent, electricity and water, car insurance), but you can also include your variable expenses (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 that of someone who has a steady job or someone who shares the costs of living with another person. Therefore, it would be a good idea to save six months instead of three to ensure that you have a good mattress that will help support you.

3. Make sure you have the necessary insurance

Just like an emergency fund protects you against unexpected surprises, insurance protects you against paying significant expenses that can get in the way of your financial planning goals. Preparing for the unexpected can save you a lot of money in the long run, as well as giving you a higher level of everyday safety.

For example, let’s say your apartment is flooded and 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. Therefore, having an emergency fund and taking out the necessary insurance will help you maintain your savings goals, even if things get difficult.

Save for your retirement

Once you’ve created your financial safety net with an emergency fund and the necessary insurance, you’re ready to start saving for long-term financial goals. A very common long-term goal is to save for retirement; even if it seems that it is far away, it is best to start saving for it as soon as possible .

The earlier you start saving, the more you’ll get out of the compound interest offered by many pension savings accounts. Compound interest is applied when the interest that has accumulated on your savings begins to earn interest on its own. Here are some examples:

  • You put €2,000 into a pension fund at 5% annual interest every year for five years.
  • After the first year, you will have €2,000 plus 5% of that €2,000, or €100. Therefore, the first year you have earned €2,100.
  • After putting in another €2,000 the second year, you will have €4,100 plus five percent of €4,100, or €105. Therefore, after the second year, you will have earned €4,205.
  • As your interest begins to earn exponential interest on its own, five years later you will have earned $11,172, and $1,172 of that amount will be compound interest .

Of note, in some cases, there are specific retirement savings accounts that also allow for tax deductions, making saving that little bit easier!

Tools to plan your personal finances

You can organize your personal finances on your own, 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
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