Personal financial plan

Personal financial plan

A personal financial plan is a long-term forecast of a family’s financial flows (incomes and expenses). This is an instrument you need to receive more for the same money rather than to spend less. It helps you map out important and interesting goals and distribute your earnings. You can’t optimise expenses in your mind as we perform a great number of small and large financial operations over the course of several years. Meanwhile, a financial plan helps you see a picture of your financial future, on the one hand, and work out its elements in detail, on the other hand.

You can frequently hear the opinion that no plan can change the situation, if there is no money. However, experience proves that financial planning brings the biggest benefits in a situation when you have little money. This is because the price of a mistake is especially high when you make a financial decision.

A plan helps you analyse how realistic your goals are and what you have to change in the current situation to achieve them within the optimal timeframe. A plan helps you estimate how particular financial decisions will influence the life of your family, for example, a decision to buy an apartment on credit or change a job or start your own business. A plan is a map of cash flows, which makes it convenient for you to manage the movement of money.

It is important to note that a plan helps you track the progress towards your goals, timely spot problems, adjust your expenses when the situation changes, and also keep motivation in your work on long-term and complex goals.

What do you have to do to draw up a personal financial plan?

  • Analyse the current situation, using a detailed account of your income and expenses over 2-3 months. An accounting practice itself yields good results but still it is better to consider accounting only as the first step towards drawing up a personal financial plan.
  • Formulate the goals you would like to achieve by a certain deadline. These should be not only big goals like the purchase of real estate or a car but also small tasks like expenses on your vacation, the purchase of clothes, a mobile phone or a TV set. You should bear in mind that the longer the term of your financial plan, the more ambitious goals you can set: you can’t project the purchase of an apartment or your business start-up in a month-long plan.
  • Plans drawn up for a period of 3-5 years and more yield best results.
  • Use your plan of incomes and expenses to determine the most appropriate and achievable combination of goals. If your plan shows that your money will not be enough to achieve all the desirable goals, you should either give up some goals or think about looking for additional sources of income.
  • Choose financial instruments (credit or investment products) that can help you achieve the results quicker or at less cost.

Example of personal financial plan (rubles)

Month January February March April May June
Income 90,000 40,000 60,000 40,000 40,000 40,000
Salary 40,000 40,000 40,000 40,000 40,000 40,000
Bonuses     20,000      
Loan 50,000          
Expenses 89,827 39,827 49,827 49,827 39,827 39,827
Food 15,000 15,000 15,000 15,000 15,000 15,000
Housing, utility, telephone bills, etc. 5,000 5,000 5,000 5,000 5,000 5,000
Heath care 2,000 2,000 2,000 2,000 2,000 2,000
Passenger transport fees 2,000 2,000 2,000 2,000 2,000 2,000
Leisure & entertainment 5,000 5,000 5,000 5,000 5,000 5,000
Clothes     10,000      
Large-value purchases 50,000     10,000    
Loan repayment 8,827 8,827 8,827 8,827 8,827 8,827
Investment 2,000 2,000 2,000 2,000 2,000 2,000
Total for month 173 173 10,173 -9,827 173 173
Cumulative total 173 346 10,519 692 865 1,038

You should not treat a financial plan as a document, which must be implemented unchanged. As life constantly changes, you should necessarily amend your plan in line with these changes.

Any financial decision should begin with drafting or checking your financial plan. Unfortunately, frequently you can’t analyse in your mind how a particular decision will influence your further life. A lot of people find themselves in difficult situations as they use loans unreasonably. In most cases, it would have been possible to foresee problems and change a decision in good time.

Example:
If a plan shows that you’ll be able to save money for the purchase of desirable real estate only in 30 years, this does not mean that this goal can’t be achieved before that time. You should choose financial instruments that will expedite achieving the goal.

You can make a plan based on the assumption that an apartment can be purchased immediately with a bank mortgage loan. However, the sums of money remaining after monthly loan payments may be too small for your family’s comfortable life.

Consider several more options:

  • the purchase of an apartment in 1-2 years – the initial payment accumulated over this time will reduce the loan amount and, consequently, the size of monthly payments,
  • investment in various financial instruments will expedite the accumulation of the desired sum,
  • the sale of some of your available assets, etc.

You should take a final decision only after you analyse all possible options.

As you can’t foresee all unexpected developments in your life, you should set aside a contingency reserve in your plan, and also think about insurance against accidents and disability of your working family members. If you wish to ensure a really comfortable life when you retire, you should make plans for creating your own pension fund in the form of a portfolio of various assets that can bring you the so-called passive income.

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