We learned about appropriate behavior in society from our parents. During our education we got acquainted with literature, history and geography, mastered mathematics and physics, gained basic knowledge of economics, politics, evolution and the like.
Although money is a basic means of exchanging goods and services in modern society, it still marks a taboo topic. Because of this, financial hardship is most often hidden from children, both in the family and at school.
As a result, young people are less likely to learn about responsible money management. Therefore, they do not know when is the right time to invest, borrow or save, how to use a credit card and when to invest in a current account minus.
By planning finances, we avoid last year’s mistakes
We often leave our finances to the luck factor and daydream about winning the lottery or hoping for a legacy that will leave us a distant native to America. However, it is necessary to realistically look at current finances and plan for the future.
Finance planning involves the successful management of your own income and expenses, and the result is meeting needs and meeting goals within the given timeframes.
The basis for managing receipts and expenditures is the home budget. The first step in financial planning is to define a budget limit, with monthly expenditures being less than the revenue generated. It is also important to include expected future revenues and expenses in the plan.
Do you have excess expenses over your regular income?
Citizens who incur a surplus of expenditures over regular income are usually supported financially by borrowing from financial institutions (overdrafts, cash loans, credit cards, etc.). However, they generally generate additional interest expense.
In finances, it is necessary to plan a surplus or at least a balanced income and expenditure. The goal is to finance investments that will generate higher revenues in the future. We do not finance current spending with loans!
If you are borrowing to settle your debts, it is essential that your newly contracted monthly loan commitments are less than your existing ones. When realizing a cash loan, it is necessary to negotiate a slightly larger amount and put some of the money invested into savings.
In financial planning, the term expenditure includes the cost of living (expenditure on food, clothing, utilities, housing, transportation, health care, education, insurance, etc.), financial expenses (loan installments), and extraordinary household expenses (penalties, damages, weddings, travel and similar.).
Responsible management of personal finances means living according to one’s own capabilities, so that the household creates cash reserves and avoids occasional borrowing.
It is important to recognize the costs where savings are possible, such as sweets, cigarettes, alcohol, food orders, daily newspaper purchases, unnecessary car rides, etc.
How to borrow properly?
The maximum amount of the future monthly loan repayment annuity is determined by the difference in household income and expenditure.
Due to the volatility of the interest rate and the exchange rate, the monthly annuity amounts also change. Therefore, it is necessary to borrow with slightly lower monthly repayment installments than we had planned to be able to set aside.
The currency risk resulting from possible changes in the exchange rate, which leads to an increase in the monthly repayment installment, is easily reduced: if you are saving in kuna, you are borrowing in kuna, if you are saving in euros, you are borrowing in euros.
Acquiring knowledge and skills is an investment in the future because the choice of high school or college typically influences the job you will be performing and the amount of income you will earn. Thus, the financing of education with credit is usually the most profitable, but it is necessary to realistically consider the costs and not overestimate yourself or your profession.
A home loan is also an investment in the future. You can always rent a property to increase your income in a crisis. However, it is important to choose the size, location and energy value of the property and tailor the purchase to your own financial abilities.
You earn enough to save too!
Life is unpredictable to some extent, and this requires the formation of cash reserves for unexpected situations and black days (retirement, education, illness, buying a new car, etc.). Therefore, the formation of a contingency savings fund is a primary objective in managing personal finances.
The actual amount of savings depends on the individual’s financial capacity. Although the most commonly recommended savings ratio is 10% of income, given that each individual has a unique financial position, that typical savings ratio may be too high or too low. Therefore, in order to define the amount, it is necessary to determine the current financial position and set realistic financial goals.
The real goals of young people are to achieve financial independence, to arrange insurance that will replace income in case of longer sick leave, to accumulate reserves that will replace income in case of unemployment, to buy real estate and the like.
Cash reserves should be invested in financial forms that yield at least the same rate of inflation. Part of the property is taxable, which should be taken into account when choosing a savings instrument, especially long-term savings.
The voluntary pension pillar is intended for people who are willing to contract long-term savings and are aware that they will only have access to accumulated funds after they reach the age of 50.
When there is a lack of income due to loss of work, our ability to spend decreases. We will very quickly exhaust savings reserves, thus jeopardizing the regular repayment of existing loans, regular settlement of overheads, rents, etc. For the purposes of protection against the risk of reduction or lack of income, we should save in the period when we receive regular income.
For this purpose, cash surpluses can be invested in various forms of savings (term deposits of banks and housing savings banks, stakes in funds, voluntary pension funds) and investments (company shares, government bonds).
The Good Finance Fund should never be used for any other purpose. So, financial planning is an important discipline.
Financial planning also involves the acquisition of various qualifications, knowledge and skills that enable you to earn additional income from part-time work.