Taking out credit or borrowing for a loan is a big part of life. You might have a mortgage, auto loan and a few credit cards on the go — and that's to cover the basics. When you add costs like insurance, emergency funds and any additional appliances, you may suddenly find yourself with too many repayments to handle at once.
That's why it's crucial to keep a good hold on any money leaving your account.
What exactly is financial planning?
There are a lot of businesses, including banks, that offer financial planning packages. It's a big industry — some people even qualify as financial planners, charging per hour to help you save more money in future.
The good news is that learning about financial planning is easy. All a financial plan does is map out how much you can afford to pay, based on what you earn and spend. The most complex thing about financial planning is working out the details and what you can afford to pay in the future.
How can financial planning help me?
Imagine you wanted to borrow money to pay for a new fridge — a financial plan works out what you can afford to borrow, based on your income now and anything you expect to earn in future. By working out the length of time it will take you to repay a borrowed amount and the interest that will be added on during repayments, a financial plan can tell you what you need to do and whether borrowing is a good idea.
What if my financial plan says no? I still need that fridge.
In that case, you might want to consider a budget. In short, a budget is a breakdown of what you need to do to make a financial plan work.
Say you worked out you can afford the fridge after all, by putting aside a little extra each week. A budget then works out precisely what you need to keep aside to meet your weekly or monthly repayment goals. Making a budget might mean going without something you don't need for a while, like a new pair of shoes or concert tickets. Or perhaps it involves keeping a better track record of your expenses, like your phone plan or other bills. Are you using all your data on your phone? If not, then maybe you don't need the most expensive phone plan.
Now you can afford the fridge — the only downside is the interest repayments. If you want to know more about how to get better interest rates, try one of our other blogs on improving your credit score.
Calendars can tell you more than just the date.
Calendars are a great way to organise your thoughts, payments, and anything needed to help you meet a payment. You don't have to print out a calendar to stick on the wall, although if you do, that's fine — as long as you can see which payments are leaving your account.
If you're using a digital calendar (on a phone or computer), set yourself notifications before the payment date comes up. That way, you can check you've got enough in your account to meet the next instalment.
How to work out a budget.
We've talked a lot about cutting back expenses in this blog, but how exactly does this help? This is tricky to answer because it depends on your unique situation and how much you want to reduce your spending.
What we can confirm is what gets added on to a loan. When taking out a loan, you also need to consider the extra costs. You can follow this sum to work out what you will end up owing overall;
(Principle (amount borrowed) X interest (% of principle) + extra fees) ÷ time to repay the loan
Every amount you take out on a fixed-loan agreement (a loan that happens over a set amount of time) will have a selected end date. With this information, you can now work out what you owe per week, month, and year.
Not sure about the interest or additional fees? These are disclosed in any loan, credit or credit card agreement you make — so check the small print first before you sign on to anything.
Financial planning and budgeting are just ways to work out what you can afford to spend or borrow over some time, which is easy enough to do, with the help of a bit of math and some careful note-taking.
Where to from here? If you've worked out what you need to budget and suddenly realised you have a lot more loans than you need, you can try something called debt consolidation. That's a whole other topic, which we cover in another blog.