According to statistics, most people do not have personal savings. Meanwhile, the ability to save is the main condition for well being.
In this article, you will learn how to plan your finances, in order to stop living from paycheck to paycheck, and increase your capital without austerity.
Rule #1: Goals instead of desires
For a dream to come true, it must become a goal. Determine exactly what you want to achieve and the time frame you want to achieve it in.
The goal can be anything: buying an apartment, repairing your pool, traveling, education for a child, saving for retirement, passive income, or starting a business.
The main thing is to set priorities and clearly understand the cost of your desires. To turn goals into a concrete action plan, write them down in a table. Use the 5 W's and HOW to help you (who, what, where, when, why, and how).
Rule #2. Counting revenue
When goals are set, you need to understand where you will get money for their implementation.
To do this, forecast your income for the next year, and write down all the sources and amounts. Income may consist of wages, bonuses, tax deductions, social benefits, rent, etc.
Irregular income, for example. From one-time earnings, dividends, interest on deposits, gifts for holidays — should be accounted for separately, using the average values for the year.
Rule #3. Consider the cost
Uncontrolled day-to-day spending is what ruins financial plans. Study your monthly cash flow to clearly understand where the money goes and how much is left over for your long-term goals.
In addition to your everyday expenses for food, catering, and travel, be sure to take into account regular spending on: utilities, mortgage fees, mobile communication, internet, and taxes. Expenses for the purchase of clothing, shoes, appliances, and household goods can be calculated in total for a year.
By detailing your expenses, you can see patterns in your financial behavior, and identify unnecessary small expenditures that eats up your cash-flow. Such spending should be reduced, and the money saved should be used to create a financial cushion. Remember, money in the bank loses value and does nothing useful for you.
Rule #4. Optimize your budget
It may turn out that your plans do not fit into your budget, and in order to achieve them, you will need to find an additional source of income, reduce spending, or revise your deadlines.
For example, you can refinance a loan at a lower rate, discuss a raise with your boss, or find a job with a higher salary. You can also increase your income at the expense of the state, for example, you can choose a more favorable tax regime in another country, get a tax deduction, etc.
If your income and expenditure calculations show that you are successfully adhering to the principle of "spend less than you earn", you will still have free money on your hands.
Your task is to manage your free money effectively. Some of the savings should be distributed among financial goals, and the rest should be invested in reliable products. Investments will provide a passive income and help you save more.
The sooner you start investing, the better your financial status will be: even a small amount can grow significantly in the long run. Your income will be multiplied due to compound interest, that is, the accrual of interest not only on the initial investment amount, but also on the interest on it for the previous time. Example of the application of compound interest — bank deposits with monthly compounding.
Before investing money, determine your attitude to risk, and your desired return. This is called risk profiling, and you can complete it with a broker.
The risk profile will determine the choice of investment products and the distribution of funds between them. For those who are not ready to take risks, conservative instruments are suitable — gold, bonds of reliable companies, cumulative life insurance, etc. They provide a low income and ensure the safety of capital. If you are willing to take risks for potentially higher returns, you can add aggressive instruments to your portfolio — stocks and mutual Funds. But keep in mind: the higher the yield, the higher the risks.
Clearly define your financial goals — they should turn into a concrete action plan.
Start keeping track of your income and expenses: this way you will see where the money goes and how much money you can eventually expect.
Find a way to optimize your budget: through a salary increase, reasonable savings, or benefits from the state.
Invest your free money to get additional income and accelerate the achievement of your goals.