Long-term financial success begins with basic education.
How do you feel about money? Lost, overwhelmed, paralysed? It is normal that, when we don’t understand a topic, we tend to feel lost, and have tonnes of open questions. However, not facing your finances will not solve the matter, nor will it make you wealthier or grant you a stronger financial future.
The truth is, financial education plays a vital role in our day to day money decisions. With the right knowledge, skills and tools, you can easily power up your financial reality. Here are the three main ingredients:
1. Spend less than you earn
Start by building a system where you have a plan for your money at the beginning of each month. Think about the main categories where your money should go and create different accounts to allocate a certain percentage to each.
For example, if you earn 4.000 euros net per month, your money system might look like this:
- Necessities account: 65% (pays your fixed expenses) - 2.600 euros
- Financial freedom account: 15% (builds your long-term investments) - 600 euros
- Play / fun account: 10% (to spend regret-free - it's your play money) - 400 euros
- Short- to mid-term financial goal: 5% (for instance, saving for a downpayment on your first property) - 200 euros
- Emergency fund account: 5% (builds your financial safety net) - 200 euros
Bonus: Do you already have an emergency fund? Having a financial safety net is one of the most important steps. Knowing that you are financially secure NOW is priceless. And yes, you can invest and build your emergency fund at the same time!
2. Clear financial goals
If you don't know where you are going, how are you going to get there? When your money has a clear purpose, you win!
Here’s how to go about setting some clear financial goals:
- Take some time and set up a money date - make it special.
- Write down your financial goals and reflect on why you want to achieve each one and what would happen if you don't achieve them.
- Divide your yearly goal into months and then into weeks - this makes it easier.
3. Strategic investments
Once you’ve started managing your money effectively and have clear goals, then you can start making your money work hard for you! Yes, you can easily learn how to do this and do this well, taking your finances into your own hands - but passively, and on autopilot.
Let’s see what happens if you educate yourself and build an investment plan and follow a strategy for investing your money in the long run. Back to our example: let’s say you are 30 years old, have available investing capital of 20.000 euros as an initial deposit and will contribute 600 euros each month for the next 25 years (remember we set this amount aside for our financial freedom account).
With a bearing interest of 7% a year, your money can grow to a whopping 600.000 euros (not accounting for capital gains taxes and inflation). After 25 years you will have invested 200.000 euros from your own pocket, while compound interest will have granted you 400.000 euros plus. If this is not letting your money work for you, I don’t know what is.
The best part of the story? You did it yourself at very low fees, passively and automated. You don't need someone else to invest your money for you. You just need to learn the basics. Remember, at this point, you are just 55 years old. It is worth it to stick to the plan.
Give yourself a 25-year head start
What does 2047 look like for you? How old will you be in 25 years? Would you be happy with the financial decisions you made back in 2022? Perhaps you didn't save seriously, or you didn't invest, or you wasted money, trying to impress people?
Well good news, today you have a 25-year head start. And you get to write the story. It all starts by educating yourself and taking responsibility for your financial future. You’ve got this!
Automating your money plan is a fool-proof way to pace towards your financial goals and enjoy life while your money works in the background.
Whatever you do, whether you take your finances into your own hands or let others do it for you, ask important questions such as what are the fees you need to pay over the years, where is your money going (which companies is your money supporting) and when can you actually take your investments out?