Personal financial planning—tips on setting yourself up for the future

During troubling economic times, many of us may have concerns about what the future holds and how this can impact our financial situation. This is why it’s more important than ever to think about creating a long-term strategy when it comes to your money, and the security of your savings.

While this sounds a little overwhelming, we’re here to help—there are plenty of tips and tricks that can help you break the financial planning process into manageable, bite-sized chunks. Below, find out how to create a savings plan that will help you reach your financial goals, throughout the different stages of your life.

However, first thing’s first—let’s get the basics out of the way. What exactly does personal financial planning mean?

• It is a comprehensive plan, projecting many years into the future.
• It isn’t just for those with a lot of money.
• A financial plan safeguards you against life’s surprises.
• It includes details about your income, savings, investments, expenditures, debt and insurance.
• It helps you to pay off any debt and save for a mortgage, an emergency fund, and your retirement.

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Creating a financial plan requires quite some time, but it’s worth it. Here’s a step-by-step guide:

The first step in creating your personal financial plan can often be the hardest. It involves asking yourself the big questions, like where do you see yourself in five years, in ten, in thirty? It asks you to consider what you value in life. One of the best ways to tackle these big questions is to think about what kind of life you’d like to live in the future, and not to dwell too much on the specifics.

Perhaps you like the idea of buying your own place, having children, supporting them through college and then retiring with a comfortable financial cushion. Or perhaps you’d rather focus on getting out of debt, remaining child-free, or retiring early. Whichever lifestyle sounds the most appealing to you will impact your personal financial plan, since it will cater around helping you to achieve these goals.

A general rule of thumb, according to the 50 30 20 budgeting rule, is to put 20 percent of your after-tax income towards your savings. But when you have multiple long-term goals, it can be difficult to know how to split this figure. Do you put 15 percent towards your retirement and 5 percent towards your emergency fund? Or should you save up for each goal systematically? The trick is to prioritize your goals, which brings us to the next step.

Now that you have an idea of the kind of life you’d like to build-up to over the next thirty years, it’s important to prioritize your savings goals to match the different stages of your life. Taking the example of saving for a future with a mortgage, children, and retirement, your priorities may look like this:

• Save for a downpayment on a home
• Save for supporting your children throughout their lives
• Save for retirement

Now, of course, some of these priorities can overlap. You could simultaneously pay for your retirement while saving for your children’s trust funds, but because supporting your kids will (most likely) happen before you retire, it needs to be prioritized. However, if we take the example of wanting to get out of debt and retiring early, your personal financial planning goals might be prioritized as follows:

• Save to get out of debt
• Start saving for early retirement
• Save for travelling around the world

As saving for early retirement requires a great deal of money, it’s best to start saving for it as soon as possible. In this instance, the minute you get out of debt, saving for early retirement begins. However, once you’ve amassed a solid amount in your pension fund, with regular payments still being made into it, you can start saving for your trip around the world that you’ll enjoy in your retirement.

If you’re unsure about saving up for your pension while you’re in your 20s or 30s, consider the following. Say you are 30 and you make €40,000 a year before tax. If you put aside 8 percent of your income towards a personal pension scheme over the next 35 years, when you turn 65, you can expect to have a pension fund of around €157,000. This figure takes into account annuity, a 2 percent inflation rate and a fund performance of six percent.

Once you’ve got an idea of where you’re headed, it’s important to take a good look at your current financial situation. Personal financial planning requires you to create a budget based on all of your incomings and expenditures, to assess the necessity of your invariable costs. Here’s how to create a budget:

1. Make a note of all of your income and expenditures over a 30-day period.
2. Group all of your expenditures into variable or fixed costs. Fixed costs are invariable costs such as your rent, your car insurance, or your electricity and gas bills. Variable costs are your flexible costs which include money spent on groceries, nights out, and at the hairdressers.
3. Assess your variable expenses and identify areas in which you could cut back. Consider using a budgeting app to make this process easier.
4. Allocate a certain amount from your variable expenses that you could put away into a savings fund each month. Following an approach like the 50/30/20 rule might prove a valuable tool here. The idea involves allocating 50 percent of your income to your fixed costs, 30 percent to your variable costs, and 20 percent to your savings funds.
5. Review your budget monthly, and make adjustments where necessary. There are bound to be fluctuations in the amount you can afford to save each month. Rather than getting disheartened that you’ve briefly strayed from your budgeting goals, accept that these ups and downs are all part of the personal financial planning process.

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With a firm idea of your goals and a good grasp of your budget, you can now begin to think about the next steps in the financial planning process. Similar to the priorities created when visualizing your financial targets, personal financial planning requires a set of financial benchmarks to be met before you start saving towards your lifetime financial goals. These include getting out of debt, saving up for an emergency fund, and making sure you are properly insured.

Before you start saving for things such as a mortgage or early retirement, it’s important to pay off any outstanding debts, especially any that have a high interest rate, such as on a credit card or on a high interest loan. By paying so much just on interest each month, you significantly limit the amount you can put towards your saving. If nothing else, try to pay at least the minimum amount required each month to avoid incurring more debt.

An emergency fund is there to protect you from life’s surprises. Like a financial safety net which buffers you from detracting from your savings goals, an emergency fund should be used when facing a crisis such as the following:

• The loss of your job, and therefore your main source of your income
• Having to relocate to look after a sick relative
• A sudden recession or a global crisis

Ideally, it should include three to six months worth of your fixed costs (rent, electricity and water, car insurance), but you can also choose to include your variable costs ( groceries, entertainment, gym membership. It’s worth considering that if you’re a freelancer, or live in a one-person household, your financial situation could potentially be more vulnerable than someone in regular employment, or someone who shares their daily living costs with a partner. For this reason, it might be a good idea to save for six rather than three months, to ensure you have enough of a safety net to help you get back on your feet.

Just as an emergency fund protects you from unfortunate surprises, insurance protects you against incurring any considerable costs that could significantly detriment your personal financial planning goals. Preparing for the unexpected can save you a great deal of money down the line, in addition to giving you an added level of security day to day.

For instance, say that your flat floods, but you don’t have any house insurance, or you’re involved in a car accident without any vehicle insurance. These situations would require you to pay out large sums of money, which could take you years to recover from. Therefore, having an emergency fund, and making sure you are properly insured, means you can stay on track with your savings goals—even when things get a little difficult.

Once you’ve created a financial safety net with an emergency fund and proper insurance, you can start saving towards more long-term financial planning goals. A common long-term goal is to save up for retirement—while it may seem like a long way off, it’s a good idea to start saving for it as early as you can.

The earlier you start saving, the more you can take advantage of the compound interest that comes with many pension-specific savings accounts. Compound interest occurs when the interest that your savings has amassed begins to earn interest itself.

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Most of us have have times when we worry about our financial security. N26 is here to support you, helping you simplify your finances and letting you plan ahead in the best way possible. Spaces is a feature that comes in handy in these situations, allowing you to stash away your pennies for another day, as well as keep a watchful eye over your budget in the present. Check out our budgeting features list for more information.