Failing to plan is planning to fail. And when it comes to money, the saying is completely true. You may think you have a financial plan when you don’t, while other people think they have no financial plan at all and yet have one, simply because they handle their personal finances correctly.
To find out whether you really have a financial plan, we need to shed some light on a few terms and ask ourselves some questions that will almost certainly make us scratch our heads and raise doubts about our financial future.
We start with two very basic questions:
1. Will you run out of money if you stop receiving an income?
- If the answer is yes, what can you do differently to reduce the chances of that happening?
And with those questions we will have settled something we probably already knew:
- We are not rich.
- We still have a lot of work to do on our personal finances.
- We are a long way from the financial freedom we long for.
“Thanks for nothing,” some will say, so let’s keep asking questions about our money. These ones are even simpler.
1. What is our current income? This one is easy: every month, how much money do we earn from our work?
2. How much is left over once we deduct all our monthly expenses and payments? Things look a bit bleaker now, don’t they?
3. How are we going to grow our income over the next few years? This is where we get closer to needing a solid financial plan, because our income has to keep growing. You can start with a few ideas for making extra money and work up to building your own business.
4. How much income will we have once we retire, and where will it come from? As the cost of living rises, an average pension in Spain will probably not be enough to live on. What’s more, we have to consider that if we depend on a single source of income, it could disappear in a few years, wrecking our plans and exposing the lack of a plan B or a parallel plan.
5. Have you invested? What income do you receive from your investments?
The health of our personal finances is measured by this question alone: how much money am I receiving without having to work for it? Financial freedom only arrives when we manage to build assets that generate enough passive income that we no longer need to work (though we are not obliged to stop).
That passive income comes from assets such as property or shares. It can also come from buying or creating a patent, or from owning a business (a profitable one, of course).
(See: This is how Bill Gates makes 1 million dollars a day without doing anything)
Every lesson in financial education leads to the need to save and invest so that we receive that income without having to work for it. Even if you received a large sum of money from an inheritance or the sale of a property, you would need to turn that money into an asset; otherwise inflation would eat away part of it.
None of this is new, but how unsure we feel when trying to answer these questions will tell us (once again) where we can start working.
Further reading
- Financial education in 15 points that are easy to follow and understand
- How to invest when you are young or have no experience
- Tony Robbins: the simple secret to wealth
Featured image: RaphaelQS, CC0 1.0, via Wikimedia Commons.
