What is the structure of personal finances
Your personal finance strategy: what, why and how ...
Every responsible person should have a private finance strategy. Even children should learn about economic concepts in school so that they can better manage their personal finances later on. That is how important this topic is!
Who of us can claim to have a personal finance strategy without pinching? That is a very small fraction of the population, most of them work in finance themselves.
This blog post describes what the term "personal finance strategy" means, which influencing factors have a major impact on it and how finopt helps you.
When you go to a bank or sit with a financial advisor, the focus is on selling your own products. The situation and needs analysis, a tailor-made planning and the resulting financial strategy are almost never worked out.
The term financial strategy is rarely used in the private sector. We know him more in connection with companies and states. It is difficult to find a uniform definition or a clear demarcation of the term.
A serious and comprehensive financial strategy answers the following questions, among others:
- How can your personal financial situation be improved?
- What goals do you want to achieve?
- What is the optimal allocation of your assets?
- How can your goals be achieved with a high probability?
- What tools are to be used when executing the strategy?
The financial strategy is the most important cornerstone for the long-term implementation of your personal financial plan. For many private individuals, intuitive ad hoc decisions are common in everyday life. A well-defined financial strategy sets the rules and boundaries for making decisions about your financial life. It facilitates a systematic approach and is your roadmap for the journey towards a better financial situation.
Both personal and external factors play a very important role in determining personal finance strategy. The following graphic shows the most important factors in determining an optimal financial strategy.
Factors influencing your personal finance strategy
None of the factors is fundamentally more important than the other. The relevance depends heavily on the respective characteristics of the factors. An optimal financial strategy can only be created if their interaction is taken into account.
"Personal factors" summarize all factors that affect you directly and over which you have direct influence.
The definition of the strategy requires a thorough analysis of the current situation. The actual situation can be compared with a position assessment and gives a lot of information where there is room for improvement.
Where do you start from? All banking relationships, financial and material assets and existing insurance are recorded and analyzed. This provides important information on income, expenditure, savings behavior and the structure of total assets.
We wrote a blog post that presents the life and financial goals and various goals in more detail:
Examples of short-term, medium-term and long-term goals
Without setting goals beforehand, it is very difficult to determine a sound financial strategy. Imagine if a friend would like directions for their hike without giving them the destination.
- How long will it take and how high does it go?
- What equipment does she need and what does she have to watch out for?
- What stops can she make?
You can only answer all of this if you know the destination, otherwise it is a so-called blind flight.
Personal life goals and financial goals derived from them are the most important restrictions but also pointers for your strategy.
Ask yourself honestly: What about your financial knowledge?
- How long will it take and how high does it go up?
- What equipment does she need and what does she have to watch out for?
- What stops can she make?
These and many other questions are relevant when creating a financial strategy. Your knowledge determines how complex your investment strategy can be, how much you should do yourself or delegate. If you lack knowledge, you can acquire it in a targeted manner in order to gain more room for maneuver for your financial strategy. This resolution can also be part of your personal finance strategy.
Let's be honest: there are people who do not like to relinquish responsibility, and there are others who prefer to be less stressful and delegate. Some love the risk and have no problems making losses in between, others are very security-oriented.
Those who have the time and interest can deal with financial tools. If there is not enough time, it is advisable to keep the effort to a minimum. If preservation of value is in the foreground and capital growth is not important, this has a considerable influence on the composition of financial assets.
All of these are just examples. which can be important when creating your personal finance strategy. Often people are not even aware of their risk appetite and their preferences in consumption. However, these and many other criteria are important factors in the financial strategy. They can only be answered by asking you specific questions.
"External factors" summarize all factors that you cannot influence directly. However, they play an important role in your personal finance strategy.
The prevailing conditions in the financial market play a very important role in determining the financial strategy.
- What dividend yield can be expected from stocks?
- How much do share prices fluctuate at the moment?
- What do medium-term loans for real estate cost?
- What is the interest rate level and what are the benefits of savings at the bank?
These and many other questions reflect the importance of the financial market. Above all, factors such as the level of interest rates and expected long-term price increases for stocks can change quickly and cause the financial strategy to be adjusted.
The macroeconomic environment can turn like flags in the wind. The last time we saw it, and in a very extreme way, was in 2008/2009. Inflation rates plummeted, the global economy paralyzed, and financial markets went crazy. The euro crisis from 2010 onwards in Spain, Italy, Greece and Ireland showed that national debt and real estate markets can bring individual countries to the brink of collapse. The entire European Union was at great economic and political risk, and resolute intervention by the European Central Bank probably prevented worse things from happening.
Inflation and economic growth are the two most important factors. Inflation determines how quickly our money devalues and economic growth affects our job prospects and wages. Those who want to invest capital preserving must have a closer look at inflation. If maximum profits are to be achieved, then the expected economic growth and the associated capital market prospects play an important role.
Your goal should be to have a written financial strategy that will serve you - in a nutshell - as a guide for making decisions in financial life in the future. Everything you have in black and white is better than just your thoughts and dreams.
Chances are, you won't get your first financial strategy down on paper overnight. For most people, it's a process that the best way to do this is:
- Provide overview: If you are at the very beginning, we recommend that you get an overview of your current situation.
- Set goals: What are a short, medium and long term goals?
- Self reflection: How good is your knowledge of finance and what are your preferences in relation to your financial life?
- Analysis of external factors: What is the current state of the economy and what about the stock exchanges?
From the knowledge gained, you can define an actionable financial strategy. It describes how you are most likely to achieve your goals, taking into account your situation, your goals, your knowledge and all external factors. Ideally, the following three areas of your financial life are affected:
- Your financial situation
- your habits
- your knowledge
A financial strategy can be based on so-called "Investment Policy Statements" and should always contain the following elements:
- Broad goals
- Activity plan and next steps
- Do’s & Dont’s
Your financial strategy is not static. You should check them out at regular intervals. Especially if there are major changes in your private and financial life - check and adjust them if necessary.
finopt is a digital financial advisor who supports you specifically in creating a personal financial plan and implementing it. Consolidate your financial situation, tell finopt about your knowledge and preferences, and record your goals.
finopt makes relevant analyzes and evaluates how good your overall financial situation is. Based on this, you can define your financial strategy with finopt. All of this is based on well-founded, academic models - your goals always remain in focus. How can you improve your situation and structure your assets more optimally? Which habits could be improved? How can you refresh your knowledge?
Objectively evaluate your financial setup, improve it in all areas with the help of finopt and the provided financial plan and follow how your finpuls improves as a result. Thanks to continuous analysis of your situation, finopt always finds potential for improvement and suggests specific measures to further improve finpuls.
If you're interested in how to set up your personal financial plan, check out our blog post about it:
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