Every day we make financial decisions, sometimes consciously, sometimes less so. Planning can help us to focus on what we actually need today and tomorrow, to work out our priorities, and to put our resources to the best possible use in order to satisfy our needs and some of our wants.
Good financial planning starts with an analysis of a household's financial situation and involves setting spending and saving objectives. In fact, it is crucial to calculate how much normally enters and exits the household’s coffers, taking into account the various income sources and different kinds of expense, whether predictable or not.
It is very useful to keep a record of revenues and expenses, in other words a budget.
A personal or household budget records the expenses and revenues expected over a certain period of time. Nowadays, there are plenty of calculators, computer programmes and apps available to help us plan: what matters is that we use them on a regular basis. We should make a note of how much we receive, i.e. our income, and how much we spend, for example, on previous and recurring financial commitments such as a mortgage or other loans, utility bills, standing expenses and unexpected outlays. This exercise helps us to determine our ability to save and to plan how best to spend what we have set aside.
To help us to manage our incomings and outgoings we can put them in the following categories:
- Revenues (income, pensions);
- Household spending (mortgage instalments or rentals, building maintenance charges, utilities);
- Spending on financial services (motor vehicle insurance);
- Spending on food and personal services (foodstuffs, clothes, cosmetics);
- Spending on leisure (books, newspapers, films, holidays);
- Spending on transport and motor vehicles (bus pass, train tickets, fuel for motor vehicles);
- Other spending on children (games, babysitters, school or university fees).
Download our budget calculator.
How much does my dream house cost? When will I be able to buy it? Can I afford a new car? How much will I need to pay for my kids’ schooling? When can I retire? Will I be able to maintain my current lifestyle?
These are just some of the questions we have all asked ourselves or will ask ourselves at least once in our lives. To answer them we need to reflect on what we truly need, on what our future goals are, and to look at the resources available to us.
The main objective of financial planning and budgeting is to verify the sustainability of our expenses, i.e. the balance between our incomings and outgoings. On the one hand, we need to be consistent in our planning and, on the other, to revise our projections over time, as families frequently tend to underestimate their expenses and overestimate their income.
There are none...all you need to spend is a little of your time!
Good financial planning is vital for making informed everyday choices. The first step is to decide on a reference period (week, month, year) and identify all the related revenues and expenses. In other words, how much we earn and how much we think we will spend in a given period of time. Some expenses, such as insurance, recur at certain intervals: to avoid nasty surprises, we could set aside a small sum of money each month. For example, if the annual premium is €600, then we should consider an imaginary monthly outlay of €50 (50*12=600).
Bear in mind that there are:
- Ordinary expenses, which recur periodically and can easily be calculated every month. These include spending on food, transport, fuel, but also any mortgage instalments or rental payments;
- Extraordinary expenses, which are occasional and can be converted into monthly expenses, such as the purchase of a new television or family vacation.
Once we know how often our expenses recur, we can establish an order of priority and a payment schedule. It is important to know how much we need to get by. In other words, defining our most pressing needs is an exercise in self-awareness. Unfortunately, choosing sometimes means making a sacrifice!
Understanding what we need is not easy, and there can be traps on the road ahead: life can throw us a curveball or two. For example, we might burst a tyre or one of our home appliances might break down. When we budget, it is important that we also factor in the unexpected.
A record of the income and expenses that can be very useful to households in planning how to best manage their money by helping them check whether their spending is sustainable and therefore whether there is a balance between money coming in and going out. It is important to verify and update the projections made since frequently families tend to underestimate their expenses and overestimate their income. Appropriate planning can help households determine their savings goals.