This article is entirely written according to the mission and values of the “Financial Freedom” Foundation to inspire more people to become financially educated and improve their quality of life. Our main areas of focus are financial literacy and long-term financial strategies. “Financial Freedom” Foundation with ID No. 206678484 is a non-profit in public benefit registered in the European Union, which performs activities in line with its mission.
Let’s be honest – planning our future is a terrifying task. When we combine that with the uncertainty of the financial area – the job seems even more complex. The next logical step coming to mind to tackle this task is to trust your decisions in this so important sphere of your life to a specialist. In most similar situations in life, this is one of the best steps. If you are ill – you call the doctor. Your car is broken – time to reach out to the mechanic shop. You need to secure your financial future – the best idea is to connect with a financial expert or investment guru. Right? Actually, no, as counter-intuitive as it seems, to trust your quality of life to a “financial advisor” is a perilous move.
We understand that right now, you are thinking something along the lines of “hmmm, how can it be that I can’t trust the people that are specially educated to do exactly that – to give financial advice?” Unfortunately, the topic is quite complex (we will do our best to shed more light on it and share with you the six biggest pitfalls to evade), but if we have to put it in simple terms, the truth is that those “experts” don’t have your best interest in mind. That’s all. It is simple, they work for money and make their fortunes from other people’s money. From your hard-earned money. How do we know that? Our team has dedicated many years to researching the financial industry, and we know its dirty insider’s secrets. Also, before we decided to get familiar with this tricky niche, we ourselves had fallen victims to most of the common traps related to financial planning. All thanks to the expert suggestions of numerous gurus. That situation motivated one of our founders – Robert Rolih, to dedicate seven years to research the industry. This in-depth knowledge is the building material of “Financial Freedom” Foundation. In this guide, we aspire to share some of the essential tips on planning your economic future and the common traps to be aware of (some of them are absolutely mind-boggling).
Who has to plan for a secure financial future?
The answer is straightforward – everyone! It is a common misconception that planning a safe future is only for those on the verge of retirement. That is the first mistake that we want to clarify. This way of thinking is wrong and has made so many peoples’ lives around the globe really miserable. For us, it is almost mandatory to start planning and managing your finances as early in your life as possible. It doesn’t matter if you are just beginning your practice or if you already are sailing along mid-career – it’s never too early to start crafting your strategy. Also, don’t be scared. As complex as it seems, having a well-planned future when it comes to finances is achievable. With little preparation and the correct information, you can go a long way.
It all starts with the goals!
Unsurprisingly, the whole planning process starts with the setting of the right goals. The idea is simple – if you don’t have specific goals, you won’t be working as hard as you should, which also could result in more money spent unreasonably. To overcome these problems, it is required to have a plan divided into three3 main phases: short, medium, and long-term goals. Without a solid strategy, even the most prudent person can be stuck in a vicious circle of debt and insecurity. Unexpected events (perfect example is the Covid-19 pandemic) can shake the financial stability of a person or his whole family so hard that they will need years to recover from it.
So, if goal setting is the first step, let’s take a look at where you should start.
The first step towards the ultimate goal of a secured financial future is to sit down for one or two hours and plan your budget. Yes, this won’t magically allow your retirement account to increase by a million dollars, but it is a good (read it mandatory) first step. Also, by planning your short-term expenses, you gain more confidence and knowledge for the long-term tasks. After establishing a monthly budget, you might be stunned by how much money is slipping through the cracks. A good idea is to use one of the modern digital tools to keep track of your expenses.
Another excellent short-term financial goal is to clear your credit cards.If you have multiple credit cards, list them according to their interest fee, start with the highest one, and then go to the next. You get the idea. Having empty credit cards can set you to a lot slower development in financial terms.
The first step towards absolute financial security is to have an emergency fund. A good starting point is to have 500-1000$, which can be used if some unexpected expenses occur. Another good idea is to gradually increase the size of this “money for the rainy days”. A good goal is to have resources to cover between 3 and 6 months of unemployment.
After setting the fundamentals, now it is time to think about the later phases of your life. First of all, if you are the main person providing the household’s monetary support, think about life insurance. But be careful with that idea because sometimes the insurances can become a significant setback in terms of finances.
After that, it is time to think about covering the student loans, of course, if you have any. But if you or someone in your family does – now is the time to figure it out. How will you address it? Create a plan and start implementing it!
When we are in the mid-term phase, it is the time to discuss our goals and dreams. Maybe you want to renovate this vacation house? Or to purchase one. Maybe it is time to move to a larger home? Plan your strategy wisely.
Finally – the long-term goals
Despite how early or late in your life, here is the moment to start thinking about your retirement strategy. A good amount of savings is 10-15% of each salary. To determine how much money you need for retirement requires careful planning, but it’s worth it. Calculate your needs and find out how much money you need to save before you can securely retire. Also, keep in mind the yearly inflation and all other fees that might eat up your savings. At this stage also is a good practice to determine how much money you need to be generated by your investments.
After the calculations are clear – increase the amount of retirement savings. Yes, your employer will match a percentage of what you are paid, but you should spare an additional portion of your salary and add it to your retirement fund.
Until this point, we covered all of the main requirements for a successful long-term financial strategy that can guarantee your well-being for the rest of your life. Now let’s take a look at the most common traps which can ruin the whole initiative.