Lesson 2. Planning and accounting of finances

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Financial literacy involves more than just knowledge of the theory of money and its depreciation. Any person or organization simply needs financial planning and accounting for their finances. Why is this so important? It's about the psychology of money. If you do not keep track of the money spent, do not plan for the future, then you will always spend as much as you earn. You have probably convinced yourself of this yourself. Even if you managed to set aside some amount of money, eventually, sooner or later, it is taken out of stock and spent on current needs.
When you see with your own eyes the amount of money earned and spent, you avoid the temptation to spend all your earnings, start saving part of your salary, and start thinking about investing. Therefore, financial planning does a very important job - it clearly shows all your money transactions. Those who consider this occupation boring and do not plan are always surprised where all the money disappears and they constantly lack it.
Even if at some point their income doubles, in the end, after a while, they face the same problem in the form of a lack of money, because they have no financial goal. And if a person takes out a loan, the situation worsens for a very long time. Now you understand how important it is to keep track of your finances, so let's get down to this topic in more detail.
It should be said right away that if you think that the essence of planning is to save money and buy a car or a house, then this is the main mistake that you will have to correct. You will see why this thinking is economically wrong in lesson four. But before that, you must realize equally important things.

Content:

Before starting personal financial planning, consider the planning of organizations. If you want to start your own business in the future, you cannot do without financial planning.

Financial planning of the organization​

Financial planning is the planning of all income and expenses to ensure the development of the organization ("Financial management and taxation of organizations", AP Levchaev). There can be several financial plans depending on the goals and directions. Such a plan is a balance sheet in the form of grouped items of income and expenses, planned to be received and financed in the coming period.
Before you start developing a financial plan, you need to understand the tasks of financial planning.

The main tasks of financial planning are:

• Determination of ways of efficient capital investment.
• Control over the financial condition.
• Respect for the interests of investors and shareholders.
• Establishing reasonable relationships with the budget, banks and extra-budgetary funds.
• Revealing hidden reserves.
• Providing the necessary resources for the activities of the organization.

Before you start drawing up a plan, you need to understand the financial condition of the organization. To cure a patient and keep him healthy, he needs to be diagnosed. This is what should be done in the first place.
A consolidated financial plan for a specific period is called a budget. That is, the budget is built on the basis of two matters - money and time. You clearly prescribe a certain period of time for which your financial plan is designed, after which you distribute financial (and not only) resources.
The budget can be at the level of personal finance, organization or state. Despite the different scales, the budget of any level has the same characteristics and criteria. For example, if your or government revenues exceed expenditures, this is called a budget surplus. If the amount of spending exceeds revenues, then a budget deficit arises and a lot starts to get out of control. A surplus is more desirable than a deficit, but the excess money must be put into circulation immediately, keeping the balance.
In the early days of financial literacy, you may think that a budget and a financial plan are one and the same. The only difference can be that the financial plan is sometimes supplemented with some recommendations, goals, and the budget mainly deals with numbers and schedules. In financial terms, the budget is laid down and you can often put an equal sign between them.

In addition to the tasks of financial planning, there are also its principles:

✔	Forecasting. The economic state of the organization and the country (sometimes the whole world, if it is a transnational corporation) is analyzed. The quality of the forecast determines the quality of the financial plan.
✔	Optimization. This means reducing costs without sacrificing the organization and its people and making the most efficient investment of money.
✔	Control. A competent financial plan does not allow irresponsibility, clearly shows who is responsible for what and allows you to control all aspects of the organization.
✔	Documenting. Record keeping is a natural consequence of control.
✔	Coordination. Financial plans of different departments should be developed in close connection with each other. Sometimes it makes sense to focus (read - invest more money) in one department while sacrificing some of the cost to another.
✔	Highlighting priorities. In order to fulfill the financial plan, the leader must set clear and clear goals. All actions and financial transactions of the organization must be subject to top priorities. Without priorities, a company can spend a lot of money on completely unnecessary directions and simply suffer financial ruin.
✔	Adequacy. It is very commendable to set ambitious goals for yourself, but unsupported ambitions can lead to dire consequences.
✔	Versatility and flexibility. The plan can be adjusted to reflect the economic climate. The economy changes every day, so you need to track its trends and amend the financial plan.

Financial planning is complex and challenging. Therefore, we will focus on common and understandable features. Revenues and expenditures form the basis of the budget of any organization, state or ordinary person. There are such articles:

Income and receipts of funds:

• Profit from the sale of products, works and services .
• Profit from other sales (fixed assets and other assets).
• Depreciation deductions.
• Receipt of money from other companies.
• Planned income not related to the sale of goods, works and services. This can be income from securities, equity participation in the authorized capital of other companies, renting out property, keeping finances on deposits.

Expenses and deductions of funds:

• Profit taxes and others.
• Depreciation expense.
• Wage.
• The cost of raw materials and other resources.
• Loan repayment.
• Rent of premises.
• Other expenses.

This is all that any financially literate person needs to know if they are not yet considering running their own organization. When you are determined to take this path, you have to study a lot more information, or else hire a financial advisor.
Now is the time to consider personal financial planning, which you can create yourself by following certain guidelines.

Personal financial planning​

For competent personal financial planning, it won't hurt you to take a time management course. This course will teach you how to properly allocate time in different areas to generate income from them. In the fourth lesson, we will look at ways to generate additional income, so you need to learn how to set the right goals and develop a strategy for achieving them, using the right time and effort. The combination of these two skills will help you get on your feet financially.
Personal financial planning will allow anyone to correctly assess their financial condition and allocate resources to generate more income. If you get bored of working with paper that you need to fill out and supplement every day, later you will see a list of applications with a nice design and functionality that are not available on a regular sheet of paper.
First of all, you need to realize the fact that any saved monetary unit can turn into two or more after some time. If it is spent on something unnecessary, you are deprived of this opportunity. Think of the amount of waste you made in a year and multiply that figure by three - that's probably the amount you could get in a year or two with the right investment.
The majority of financially successful people have therefore reached their heights - they are used to spending a minimum, and investing the rest of the money in something. After all, everyone knows the stories when those who won the lottery eventually became beggars again in just a year. They weren't financially literate. However, if they had devoted at least a couple of hours to financial planning, they could clearly see that just a year later, this money will not remain.

Before you draw up your personal financial plan, you should know the principles of personal finance planning:

1. The principle of economy. Patience is strength. This quality helps any person in any area of life, it will also help in personal finances. Desire for immediate gratification and impatience are signs of immature, childish behavior. We all know that we need to save, but a very small percentage of people do it. However, it is not worth going to the extreme, because saving for the sake of saving will also not lead to good. We'll tell you what to do with the money saved later.
2. The principle of sufficiency. We need to put a barrier between ourselves and modern media. The function of any advertisement is to show you that you will be unhappy if you do not buy this product. Learn to think about the usefulness of purchasing a product in terms of value. If the product does not bring you anything but dubious pleasure, do not buy it. Be happy with your current situation and think about how self-sufficiency will help you make it even better. Self-sufficiency does not mean sitting back, it means being happy now, but at the same time knowing how you can get even better. Be grateful - this is one of the most overlooked qualities of a person.
3. The principle of efficiency. Finding a job where you don’t just think about money is very important to a good life. In this case, your efficiency will increase several times, and with it your income. Love what you do. This will help you to always be in high spirits and find time and strength for much more.
4. Research principle. Financial literacy implies a constant awareness of money and opportunity. Find out what products and products you really need and do not overpay for more expensive versions. All of your financial decisions today concern you and your family in the future.
5. Priority principle. Every day we are faced with one very important problem - what to spend and where to invest our money. Even millionaires face this. Remember that if you buy one expensive item, you are missing out on another. With the help of one product or service, you become smarter and better, with the help of the second, you degrade. As practice shows, second products are bought much more often. Distinguish the former from the latter.
6. Tracking principle. Money management should become a habit. Waste money leads to financial ruin. Track and always remember how much money you have and what you spend it on.
7. The principle of the humble life. Even if only for a while. You need to ensure that your income is formed without your participation, and only then can you afford much more. If your passive income reaches the amount you need and makes you happy without stopping, this is a sure sign that you have achieved financial independence. A modest life does not mean bad, it means more reasonable. Of course, if you work with people, you should have nice and tidy clothes. The point is not to buy extra clothes.
8. The principle of avoiding debt. Any loan and debt eats up part of your financial future. It is possible in some cases, which we will talk about later.
9. Simplification principle. Simplicity leads to efficiency, understanding, and a lack of stress. Any new thing, in addition to good emotions, carries a lot of bad ones. Buying an expensive new phone just tempts you to play good games and use nonsensical apps on it. Zen-style simplification can help anyone to be happier, and in this case, financially literate too.
10. Investment principle. Remember inflation? Simple storage of money is certainly better than reckless spending, but this behavior cannot be called effective either. Investing always carries a certain risk, but without it, money is impossible in the world. Read a lot of books, watch videos, and meditate.
11. The principle of caution. A wealthy person is characterized not by an expensive car, but by how many months he can live if he loses his job today. They say that if you have enough money for six months of a good life, then you can be considered middle class. Nevertheless, the essence of financial well-being is not to work (or work wherever you like) and at the same time have a constant stream of income.
12. The principle of cooperation. Of course, you can have a good income working alone, but the information age offers a large number of opportunities for cooperation with other people. The principle of synergy works very well in the financial sector. With the right team, anyone can generate more income.

Now that we are familiar with the principles of personal finance planning, it's time to move on to practice.

Five steps of financial planning​

Financial planning takes only five steps . Each step should be treated with due attention and not proceed to the next until you have finally figured out the previous one.

Grade​

First of all, you need to clearly assess what your assets and liabilities are. First, determine how much cash and electronic money you have. Then write down in the “assets” column what brings you income: deposit, monthly salary, investments. In the "liabilities" column, write everything that does not bring you money and draws money out of you: a car, a house or a mortgage, a loan, rent bills, the Internet and the use of a mobile phone. Determine at least an approximate amount of money that you spend per month on food, clothing and entertainment. And yes, the car and the apartment are your liability, and we will talk about this separately.
Get rid of loans. You should understand that in the end you will give it away anyway, but it will suck interest out of you and form the debtor syndrome. Remember: no debt, minimal needs can be met for any income. Of course, you don't need to go to extremes - live in a car or walk in torn clothes.
Simply put, you should end up with two approximate figures - your total income and expenses per month.

Target​

There is nowhere without a goal, especially if it is long-term. Almost everyone is capable of collecting a certain amount in a couple of months, but if we are talking about several years, then you need iron discipline and motivation. And it is the goal setting that will help you with this.
Ideally, you should plan for years ahead, because that is what constitutes financially literate behavior. For example, it could be the entry "A million dollars in ten years." It has its drawbacks, but it's better than nothing. Of course, your goal should be objective, but on the other hand, it is very easy to underestimate yourself and in the end you will get less than you could. When you start to understand your finances and invest money, you will understand that anyone on the planet can save a million dollars. Let's think about what goal a financially literate person should set for themselves.
Your financial goal should not be something like "Buy a car in two years" or "Buy a house in five years." This is economically incorrect thinking, because even if you do achieve this, your costs will increase significantly and you will spend the rest of your life keeping your car or home running. The goal of “Having a million dollars in ten years” is better, but it means that after this period of time you will just start spending your million and eventually slide into the financial condition where you started. Your goal should be to create passive sources of income. Roughly speaking, it can be a million dollar bank account, which every year will allow you not to work and withdraw good interest. However, banks and the economic situation are unstable, so you need to remember one more golden rule:
If your goal is "A million dollars in the bank and five more sources of passive income from various investments," then this is already close to financial solvency. We will talk about this in more detail in the fourth lesson.

Create a plan​

The first step in making a plan is to cut back on your expenses. It is the cornerstone of financial literacy. Remember that a person is able to spend all the money he has, regardless of his income level. Therefore, first of all, find items of expenditure that can be reduced or eliminated altogether. There is an opinion that with almost any income, you can reduce the amount of expenses by 50%.
And it is these very 50% that you should put aside during, if not your entire life, then at least for the duration of this financial plan. This is the second step.
Remember that, if desired and certain skills, one currency can be turned into three or more. Therefore, the more you save, the greater the chance of increasing this amount. If you don’t save a penny, then through simple calculations you get zero, multiplied by any number and get zero as a result.
The third step is investing. We will talk about this separately and in great detail.
So, cut back on expenses, save money, and invest. Even if you just won the million dollar lottery. This applies to every person, regardless of their current level of income.

Execution of the plan​

Hang it up in a prominent place. If you use an application, let it be on your home screen so that you can instantly enter it and make any changes. If you bought food, immediately add this amount to the expense items, while clearly being aware of how much you have allocated for food per month. You can go on a diet, it's generally a great way to become healthy and rich.
Your financial plan should become your second nature. We do not advise you to think only in terms of money, because otherwise you will become degraded as a person, but do not forget about your goals. The best and greatest goals are achieved through personal effectiveness and financial literacy. Remain human, but remember your financial well-being.
By the way, if you don't like the word plan, come up with your own motivational word. Think about what word will inspire you, not bore you.

Monitoring and reassessment​

There is no problem in adjusting the plan. When you wrote the first version of it, you may have very dimly understood where you will invest them. Once you've slashed your expenses and set aside ideally half of your income, it can take a couple of months before you have a good amount of money. Spend those months on financial books and then adjust your financial plan. It should always change towards cutting costs and optimizing investments, and not vice versa. This is the main rule for adjusting your personal financial plan.
Of course, you could have allocated a completely negligible amount of money for food, and in this case, you can increase the cost of food. Also, do not forget about products that tend to run out for a long time. For example, you may not think about shampoo and razor blades, but after a while you will need them. In this case, it makes sense to buy in bulk, but you should take money for these expenses only from items of other expenses.
At this point, you probably think that your life will turn into a living hell. This is true, but on condition that you do not look for new sources of income. Agree that if you set aside 50% of your income for investments, then new sources of income will allow you to eventually get out of the first difficulties and spend more money on entertainment and other things. Remember that there is no other way. Nobody forbids you to enjoy life and at the same time look for new opportunities that life offers.
As we said, financial planning can seem like a very boring exercise because most people in the world don't like numbers. But a person loves beautiful graphics and colorful pictures more. Consider mobile applications that will always be at your fingertips and have good visibility and interface.

Personal budget planning software​

Monefy​

This shareware program has a very nice interface and has a number of advantages. For example, by syncing with the Dropbox service, you can manage your family budget. Any entry in this application will be visible to those people with whom you keep this budget. However, you can use it just for yourself. The application has a built-in calculator, which is very convenient.
It is also worth noting a beautiful and informative graph that will help you see in a few seconds what you spend your money on and what brings you more income. You can see your income and expenses by day, week, month and year, which will help you to be more mindful of your money.

Money lover​

This application is not only about accounting and financial planning, it is constantly evolving and is already trying to cover many aspects of human life. You can create two wallets for free, for the rest you will have to pay a small amount of money.
Another good difference from other applications is the two tabs "I owe" and "I owe". As you can imagine, the first tab should always be clean, and the presence of the second will not always make your life better. But if it did happen, the application will help you not to forget about all your debts.
There is also a tab "Accounts", which allows you to finally find out the total amount of all your bills - rent, rent, internet, phone, and so on.
In addition to all this, the program contains a currency converter, interest rate calculation and is able to find the nearest ATM.

Financius​

The simplest application presented. It consists of three simple menu items "Accounts", "Transactions" and "Reports". You can track the financial health of your company or any family member. There is no financial planning here, but if you are an inexperienced user of applications, you can start with it. It's free and ad-free.

CoinKeeper​

This application is a financial management and presented in a playful way. In order to spend money on something, you need to flip a coin to a specific icon. There is an interesting feature called "Automatic Budget", it allows you to quickly calculate the main categories of expenses for the month.
You can set reminders for recurring expenses and keep records with your family.

Toshl​

What's unique about the app is that it constantly reminds you that you might be over budget. However, its disadvantages are paid use, as well as the fact that some things need to be entered manually.
We advise you to try all of these apps and end up choosing the one that suits you best. They develop and evolve, which means that soon it is possible to add other functions. If you do not have the opportunity to use mobile applications, Internet services are offered to your service. There are a large number of them and it is quite difficult to single out any separately.
In the next lesson, we will look at the financial system and financial institutions. And in this we explored personal and organizational planning. We found that there is not much difference between planning for personal finance and planning for a financial institution, and that there are many similarities. The essence is always the same - reducing costs and directing financial flows to investments and capital augmentation.

Test your knowledge​

If you want to test your knowledge of the topic of this lesson, you can take a short test consisting of several questions. In each question, there can be only one correct answer. After you have selected one of the options, the system automatically proceeds to the next question. The points you receive are influenced by the correctness of your answers and the time spent on passing. Please note that the questions are different each time, and the options are mixed.