If you want to know how to achieve your personal and business financial goals, this is the text for you. In this text, I will describe how to make a financial plan and give useful recommendations regarding financial management that you can apply immediately.
Financial management – concept and meaning
Personal finance management means how, in the broadest sense, you manage money, how you earn, spend, save and invest money, but it also includes handling financial products (loans, credit cards, insurance, private pension, investments, etc.).
The goal of personal finance management is that your income (earnings – salary, fee, and other income) is greater than your expenses (costs), and that you can use the “surplus” – the “balance” to achieve some of your desires and goals.
The idea is to find the best way for you to allocate money and to choose the right financial products, to invest money in the best way to achieve your financial goals.
As I have a lot of entrepreneurs in my environment, I often get asked how to manage a company’s finances?
The answer is very simple – in a similar way to personal finance, because the basics of personal finance management are no different from a company’s finances.
Many people do not keep accurate records of their income and expenses, neither when it comes to personal finances nor their company’s finances, so finances often seem incomprehensible to them and as if they cannot be improved.
I often hear that people have already done everything to improve their finances, however without keeping any records of finances by months, amounts, sales volume, income, expenses. They say: it depends, it is not possible to determine exactly. Sometimes they can’t even determine the cost of producing a product.
Keeping track of transactions can already have a positive effect on our finances, because we will see exactly on what and how much we spend, and we will also see room for improvement.
Keeping track of income and expenses
In order to know on what and how much you spend, and the amount of your income, you need to keep track of what you spent your money on, and on the other hand, on what basis you had income and how much.
If you have a company, it is best to keep 2 separate records: 1 for yourself, 1 for the company, no matter how much income / expenses overlap.
You can keep records in an excel spreadsheet, in mobile applications, special applications (primarily for companies) or manually.
No special prior knowledge is required to keep track of transactions, and it is best to start managing your transactions today.
When you decide to manage income and expenses, the most important thing is to elaborate your categories of income and expenses in as much detail as possible, because that is how you will find the category where your money “runs away” the most.
Examples of personal income: salary, gifts, help, income from real estate, interest, etc.
Examples of business income: income from the sale of products, provision of services, consultations, income from sponsorships, donations, etc.
Examples of personal expenses: rent, overheads, food, going out and restaurants, fuel, personal care, household items, buying clothes and shoes, loan installments, etc.
Examples of business expenses: rent, overheads, employee salaries, production, distribution, marketing, bookkeeping; periodic: procurement of equipment, research & development, etc.
After a few months, such record can especially help freelancers, entrepreneurs, and people in general who do not have a fixed monthly income see what their average income / expenses are.
Setting goals
Setting goals and creating a financial plan are interrelated. We make financial plans in order to achieve certain goals.
Before creating a financial plan, it is important to set goals that you want to achieve, because those goals are the driving force behind why you manage finances, save, invest… Goals should be based on your interests and values and should be specific, measurable and achievable.
Examples of personal goals: buying a new phone, setting aside for a golden reserve, saving for a child’s schooling, traveling, 1 year without having to work :), buying a car / apartment or saving for a leasing / housing loan, repay overdraft or credit card debt.
Examples of business goals: paying salary to yourself in the amount of 4,000 euros per month:), buying a new laptop, buying office equipment / furniture, expansion of business into new markets, new location…
When you write down why you are saving, how much each of these goals costs, in what time you would like to achieve each goal, as well as how much you need to set aside to achieve your goals within the given time period – then you start creating a financial plan and start setting aside money in accordance with these specific goals.
One part of savings is for short-term and medium-term goals, such as travel, some purchases, such as buying a car, or saving money for a down payment for a housing loan, and the other part of savings is long-term: we save money for the time when we will no longer work actively: for the time of retirement, when our income will no longer be the same as our salary.
When you set aside a certain amount, that is, when you manage to save some money, a “better” step follows: savings management.
How to create a financial plan?
With a financial plan or budget, you determine how much and on what you will spend money in a certain month or in a certain period in order to achieve a certain monthly surplus and to achieve your goals. I am a supporter of the monthly budget, and considering that most people receive monthly salaries and other income, I think that is the easiest way to make a plan.
Based on the income and expenses from previous periods, you make a financial plan in which you determine how much you will spend on each category, and for the category of income, how much you will earn. In the category of expenses, you need to reduce your expenses compared to the previous period in order to increase your monthly balance. You can include an increase in income in the plan later.
The goal of better budgeting is to reduce expenses and increase income so that the balance is as high as possible to achieve your goals.
After setting your financial plan – budget, it is very important to continue to manage income and expenses in as much detail as possible, and at the end of the month to check whether you are within the planned limits and whether you have achieved the planned monthly savings.
Change your financial plan if you need to.
What are the most common mistakes when it comes to money and financial management and how to avoid them?
Apply
Financial management and financial literacy do not only mean that you have certain knowledge about finance, but also that you use it.
The case with most people is that they know how they should manage their budget, but due to the lack of motivation, time and sometimes due to the dilemma about what is the best solution – there is no action, a concrete step to do something. Thus, it is not uncommon for someone to have a surplus of funds, but never make a term deposit in a bank, invest in an investment fund, or in a pension fund, etc.
In that way, your money stays in your house or on an account without term deposits and loses its value.
To preserve the value of the money you have saved, make a term deposit and / or invest.
Little is a lot
It is possible to save money even with a small income, just as it is possible not to save with a large income. Saving is more a matter of decision than potential.
What is “little” and “a lot” – everything is relative.
In any case, we can conclude that one thing is certain: “a little” is more than “nothing”.
So start saving and investing as little as possible as soon as possible, rather than wait for some better days.
You can expect higher profits when you save even small amounts for a longer period of time, than large amounts for a shorter period.
When you start saving and investing, you can always stop if you decide you don’t want to anymore.
However, you will never be able to turn back the time and say: If I had started saving at the age of 25, at least 100 euros a month.”
Save and then spend
Many people do not have savings because most of them say that they will save and set aside what is left at the end of the month. And most often nothing or very little is left.
You should save at the beginning of the month, more precisely when you receive your salary / fee. First you need to save, that is, set aside what you want to have left, and then spend the rest.
Turn on financial autopilot – automate your finances
Thinking about finances can be tiring for most people, some even get nervous when it comes to money, and some just don’t care.
To avoid constantly coming back to the same questions and decisions about finances, one of the solutions is to automate your finances. With a financial plan, you set your own framework, and you stick to that framework.
First you distribute your income and expenses and determine how much you want to save and invest, and later you only adjust your financial plan.
You automate the allocation of the amount you set to save.
Automation is most easily achieved by standing orders to automatically withdraw a certain amount from your account on a certain day of the month for: term savings in banks, investment funds, pension fund.
That way, you don’t have to think every month about where and how much money you have to pay, but you determine in advance some amount that you know you can set aside (you can always terminate a standing order if you later realize that it you don’t want it).
It is also important that you get into the habit of entering transactions in excel / application, etc. – how much you have earned and spent, set aside, etc. – so that you can later have a clear overview of where your money is “running away”.
It doesn’t matter if you don’t enter transactions every day, but always try to enter at least approximately those transactions that you did not enter in the previous days.
(INSTEAD OF CONCLUSION)
IMPORTANT STEPS IN FINANCIAL MANAGEMENT:
- Start managing transactions by amount and category (in excel, mobile app, manually)
- Set goals
- Determine how much you want your monthly balance to be (how much you want to save)
- Set your budget – create a financial plan
- Continue to manage your transactions and monitor whether you are within your budget
- When you have savings / “the balance” – “employ” that surplus money – deposit in a bank, invest in an investment fund, in a private pension, etc., in accordance with your goals.
- Activate the financial autopilot of savings and investments
- Change any of the above if you need to
Hire a financial and business coach – mentor as support in creating a financial plan, saving and investing, and starting and developing your business
Through 1-on-1 coaching, I can support you in achieving your financial goals. Here you can find out about my individual coaching service and schedule your first session.
Author: Karolina Herbut www.herbutkarolina.com (This text is copyrighted and can be published on another site with prior approval and mandatory reference to the source text, as well as with the link to www.herbutkarolina.com in the text and at the end of the text.)