In this article I explain how to create your personal financial plan, starting from filling your budget.
You should know that the financial plan is the essential instrument to start your journey towards financial freedom.
YOU’RE STARTING SITUATION
The budget, filled in each of its parts, represents your starting situation, each month you must update it (this operation will take a few minutes, but will have a great impact on your finances), monitoring that each small change is going in the right direction, according to the objectives that you had proposed in principle.
Now we come to the most important part:
- I will explain in detail how to fill in the sections of your personal budget:
- Electricity bill or other invoices: they often have a bimonthly expiration, so insert half the amount you owe every two months into the accounting.
- Summer or winter vacation expenses: Divide the annual expense by 12 and add it to the monthly expense.
- Extraordinary maintenance expenses: if you must maintain extraordinary expenses linked to real estate you own, for example replacing the boiler or fixing the pipes, deduct the amount directly from your liquid availability. If they have the same expenses every year, then they are fixed expenses that you deduct monthly from your cash flow;
- Mortgage loan: each month update the amount of the capital that you have to repay to the mortgage that you have contracted: these will be small steps, I know, but you will gradually see how your net worth increases (if your property loses value);
- Main house or other houses: I advise you to insert the market value prudently, that is, the lowest among the prices that you can find by doing a search for similar properties in your area or even on the same street. It is better to calculate a low estimate than to be based on values that may not be real: in particular the fact that you have paid 100 does not mean that after 5 years it is still worth 100.
The property in question could be worth much more because a metro station has been built nearby or much less because it has been devalued over time.
Updating your budget every month is a fundamental step for your financial plan
To facilitate the monthly completion of your budget with monthly expiration, I advise you to set a specific date each month.
THE BIGGEST PROBLEM (AND HOW TO SOLVE IT)
Very often people come to my courses and complain that they cannot improve their financial situation, despite the efforts made.
You know why?
They don’t have a budget.
They have an idea of how much they spend and how much they earn, but it is very vague. In fact, it often happens that when they know how much they spend because they consume everything they earn.
WHAT IS THE BUDGET DEFICIT?
If you spend more than you earn you are in budget deficit. Similarly, if you are overweight it is because you consume more calories than you burn. So if you are always in debit it is because you spend more than you earn.
Your budget, on the contrary, must take into account the first rule of Financial Freedom: pay yourself first and create a surplus budget.
What do I want to tell you?
Try to think today, everything you earn is intended to pay the bills in the first place, and only what -maybe- remains is what can be put into the bank.
THE SURPLUS BUDGET
Having a surplus budget means taking a part of the money you earn and putting it aside to create the capital that will be used to make your first investments.
The amount of money you will be able to put aside is up to you: it can be 10% or 30% of your income.
The most important thing is that putting this percentage aside must come, first of all: before the meal,the mortgage, the children, paying the taxes.
Constantly put this percentile portion aside for yourself and then pay the rest!
What are the advantages of the excess budget?
The advantages are two:
– You will be able to immediately individualize superfluous expenses and eliminate them;
– You will finally have a strong motivation to find how to earn more. This reasoning may seem absurd to you, as perhaps many principles of Financial Freedom that you are discovering little by little.
However, most of the right things are those that go against intuition or instinct.
When you get used to reasoning in these terms, the result changes immediately, but I advise you if you think you are earning little, do not go looking for a second job and continue exchanging your time for money. Rather, try to create a source of income independent of your time.