We form a budget for the month
You need to know where you are before you can pave the route. As a result, let’s begin with reviewing actual revenue and expenses. The longer the period needed to cover – say, a year – the more the budget fluctuated from month to month.
All sources of income, including one-time ones, should be considered: salary, bonuses, freelancing, money from renting an apartment, revenue from the sale of old stuff, and interest on deposits.
It is critical to consider everything, including “little” costs such as transportation, taxis, couriers, gifts to coworkers, a child’s kindergarten, or any subscriptions. Expenses should be treated similarly.
It’s also crucial to investigate whether there are any simple ways to cut mandatory spending, such as getting discount cards at your preferred businesses or paying using cards that offer enhanced cashback in various areas.
The most straightforward financial aim is to stay within your budget. It will contain the amount you save each month and your income and spending. All of this will enable you to construct a monthly budget.
Working on basic financial security
It is possible to control your budget in the present by understanding the structure of household financial flows. The remainder of the funds can be set aside for future use. But, again, awareness is required, as are clear financial objectives.
The SMART technique has already been discussed in further depth. We’ll repeat it: “I want to save $100,000 for a vacation in ten months” is an excellent financial objective. And while “I want to get rich” is an understandable aspiration, it is not a monetary aim. An economic goal should be explicit, quantifiable, attainable, meaningful, and time-bound.
Short-term, medium-term, and long-term goals are commonly split. First, it is preferable to begin by attaining short-term objectives to provide the confidence and motivation necessary to adopt a long-term strategy.
Anything you can accomplish in a few months is considered a short-term aim. The most crucial is inflating an airbag and closing modest loans and credit cards. Experts argue about the priority order: on the one hand, interest on loans devalues any savings. Thus, they must be paid off first. However, if the family does not have a stable fund, any unforeseen event, such as illness or job loss, may push it into debt. Everyone must choose which aim is essential to them, yet both are critical.
Set medium-term goals
It would be best if you continued to increase your financial security in the medium term. But now that the loans are paid off and the “rainy day” fund provides protection in the face of adversity, one can think back on dreams.
For the next 1 to 5 years, medium-term goals are evaluated. Renovations to a home, a down payment on a mortgage, studying abroad, or purchasing a new car are all examples.
At this point, it’s a good idea to incorporate stock market investment into your financial plan. The current approach to investing proposes that you should first determine the portfolio’s composition by the investor’s personal life and financial goals rather than by the most significant return. It’s one thing to wait a year or two after achieving your objective, whether buying a home or retiring. Another is the planning horizon of 30 years. The essential premise is that the longer it takes to attain a goal, the more risk the investor can take.
Planning for retirement
The construction of pension savings is the essential long-term financial goal and completing the complete financial planning process.
Consultants recommend putting 10% to 15% of your income into a long-term pension portfolio. In three steps, you can more precisely calculate the required amount for a personal pension fund:
Estimate your expected monthly expenses. The current budget will be a good guideline, but it is worth including additional costs, such as medical care.
Subtract the income by then – the state pension itself, perhaps rent, part-time jobs, etc.
The remaining amount will need to be accumulated by the expected retirement date. American sources say about the 4% rule: there should be enough pension savings to live on 4% for a year. This figure is based on data on the yield of low-risk securities in the US stock market from 1926 to 1976.
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