What is a financial plan and how to make one

Why do you need a financial plan

Most people have desires related to money. One wants to buy a car and an apartment, the other wants to live comfortably in retirement, and the latter hopes to build a shelter for homeless animals. But if you ask everyone what they are doing to fulfill their aspirations, few will give a clear answer.

A financial plan comes in handy to transform a dream into a goal and make it achievable. This is a document that fixes financial goals and how to achieve them.

How the financial plan differs from the budget

You can better understand the difference by looking at the example of an organization. For her, the analogue of a financial plan is business plan. This is a large-scale document that contains a market analysis, a list of tasks, long-term goals and sources of investment. And the main thing is the result, which the company should come to after the set time.

It's the same with a personal plan. It can be short-term, for several years, or long-term, for decades. Only instead of the results of the company, it will have the goals of the person.

Both personal and corporate budget is a scrupulous accounting of expenses and income, as well as a detailed forecast of expenses for the near future. Usually for a year. Sometimes a document is drawn up for a period of up to three years - and not only for organizations, but also, for example, for the whole of RussiaFederal Law "On the Federal Budget for 2021 and for the Planning Period of 2022 and 2023" dated December 08, 2020 No. 385-FZ. It is possible to plan for a longer period, but it is rather useless: too many factors will interfere in the future and everything will have to be recounted.

Budget does not duplicate the financial plan, but supplements it. To achieve your goals, you need to understand what is happening with income and expenses. The forecast of the latter will help to avoid unnecessary spending.

How to make a financial plan

There are several basic steps.

Define financial goals

It can be difficult, because you need not only to remember your desires, but also to concretize them. For example, it's one thing to dream of a country house where you can go for the weekend. This is an abstraction tied to emotions. For the purpose, you need specifics: what kind of building do you want, in what area, what is the price of such buildings now? When do you expect to buy such a house? How much will it rise in price by this time?

The specifics will help you find the best option and formulate clear terms for achieving the goal.

Let's say a summer house with amenities on the street, to which it takes a couple of hours to go, will cost less capital structure in the suburbs with the possibility of living in winter. Accordingly, the period for achieving the dream will be different.

There can be several financial goals. You can strive for them simultaneously or sequentially. But in any case, it is better to give them priority - everything does not always go as we would like.

Specify savings plans

If there is a long time before the date on which you have scheduled the achievement of the goal, there is a great risk of postponing any active actions until better times. So you need small control points to navigate. To do this, divide the target amount by the number of progress tracking periods.

For example, you want in four years to buy a car, which now costs a million rubles. It is not easy to predict the price of a car in the future, but let's say we will focus on 1.2 million. Then you need to save 300 thousand a year, and 25 thousand a month.

Quite a large amount. Therefore, it may be worth either to moderate appetites, or to increase the period of achieving the goal. If everything suits you, it remains to figure out where to get the money in order to save it.

Think about life

Sounds philosophical, but there is a practical thought behind it. People tend to assess their financial condition and plan savings taking into account their current financial situation. This is correct and logical: what data you have, you use it. But with long-term goals, you have to use your imagination.

For example, you decided to raise money for a comfortable old age, but now you are less than 40 years old. This means that there are at least 20+ years of active work ahead. It is unlikely that all these years you will earn and spend the same.

Nice things like having kids or unpleasant things like getting fired can happen to you. All of them will make adjustments to the achievement of financial goals. Some events, such as new family members, can be planned. And if you are going to have a baby, it is better to take this into account in the document.

Understand your finances

Here you have to tackle the budget, which we have already talked about. It is important to understand how much you earn and spend - and over a long period of time, and not in a month. Maybe over the past 30 days nothing has broken down, there was no need to pay for insurance, and even the heating has already been turned off, which has reduced the bill for Housing and communal services.

Therefore, you need to analyze the balance for a longer period in order to understand what is going on with your finances in general and how much money remains. The more you can procrastinate, the faster you will move towards your goal. How to make this difference is the next step.

Think about how to increase the difference between income and expenses

In a global sense, there are two options: spend less and earn more. The first has a huge drawback - there is not enough room for maneuver. You cannot endlessly squeeze in expenses, especially over a long time period. And some do not spend too much anyway.

But in terms of earnings, there are no restrictions, it all depends on your mood, willingness to work and ingenuity. It could be own business instead of or in addition to the old job, or just an increase in income from the main activity. But for career growth, you will need a separate plan: in which direction to develop, what to study, and so on.

Decide how to store your savings

Better not in a drawer - so savings will gradually melt due to inflation. That is, the bills will remain the same, only now you can buy less for them. Money needs to be profitable. Just a little bit.

If the financial goal is short-term, it is better to choose less risky (but also less profitable) ways to invest them. For example, a bank deposit. The rates on them are now extremely low.Information on deposits (deposits) of individuals and non-financial organizations in rubles, US dollars and euros as a whole for the Russian Federation / Central Bank, but still not zero. Another option is bonds. Buying them, you kind of give the person who issued the securities, money in debt for a specific period. And the borrower promises to return the funds on the specified date, and along the way pays a fee.

If we are talking about 10, 20 years, you can consider other ways invest - for example, invest in stocks, ETF or something similar.

What to remember

1. The financial plan helps to formulate specific goals and stages of their achievement. It can be short-term or lifelong.
2. Having multiple goals is okay, it just gets a little harder to calculate. We'll have to distribute savings in different "baskets".
3. Keeping a budget to meet your financial goals is important.
4. It is more efficient to increase savings through big earnings. But this does not negate reasonable economy.
5. Before reaching the financial goal, savings should be invested somewhere, so that the income from them at least compensates for inflation.