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.
The six dark forces of investing: you are losing money without even knowing it
The commission camouflage effect
This trap is one of the most insidious ones. For example, let’s say that you put your money in a mutual fund. And if (as it is often) you have to pay 2% tax per year, this can cost you around half of your savings in the next 20-30 years, let’s say. It is pretty illogical at first glance, but you will be shocked if you do the math. In this situation, the power of compounding is working against you. The worst part is that your financial advisor won’t share this with you – sometimes due to incompetence, at others due to greed.
Unfortunately, sometimes the insurance companies are working only in their interests. In the world of finances, this has become the norm – only to take care of the company’s interests. Currently, every financial advisor is selling the financial products that his company is paying him with the highest commission.
Bad guys are setting the rules of the game
Put in perspective, maybe just around a few per cent of the financial advisors can give sound advice and are willing to do it. The rest are the “bad guys” who, believe us, don’t care for your financial security at all. Furthermore, most often, those guys are managing the rest of the financial advisors’ hordes. So you might even become a victim to an advisor who is just not even knowing that he is ruining your monetary future.
Fortune telling investing gurus
Those are our favourites! If you ever encountered one, you can recognize them by the bold statements and guarantees that they claim. Often, promising guaranteed growths of unheard per cent per year is their main tool. The truth is that they had one or two (at most) good calls in the past, and now their whole strategy is based on this credibility. The sad part is that statistically speaking, if you are long enough in the financial game, at some point, you will have a correct prediction. Just don’t trust them and have in mind that, on average, the forecasters’ predictions are accurate at around 46% of the time. That means that half of the time, they are wrong!
Using the wrong ROI calculator
That is a sneaky one! Let’s take a look at the basic formula for calculating ROI. ROI equals the return divided by the initial investment and multiplied by 100. Let’s say that you invested 1000$ and gained 150$. 1000/150 is equal to 0,15 multiplied by 100 equals 15% ROI. Simple? Not exactly. Sometimes the gurus are conveniently sparing important information. For example – additional costs. Also, where is the invested time in this equation? Yes, the most valuable asset is not included in the calculation. And trust us – it makes a difference. To avoid the trap of not including the value of the time in the calculation, just calculate your average pay for an hour. Then figure how many hours you need to invest in the field your financial advisor suggested to you (let’s say stock buying). Those multiple hours spent daily tracking the movement of the stocks adds up. Calculate them and subtract their cost from the return. You might be totally surprised how much the ROI percentage has changed. It actually might become a negative value.
The lure of the shiny Next Big Thing
Most of the financial advisors that are trying to persuade you to do something beneficial for them or their employer will repeatedly stress how if you jumped on the opportunity at the right time, now you could have been very rich. What they forget is that for every big hit out there, hundreds or even thousands of other ideas are failing miserably. It all comes down to pure luck. If the chance is less than a per cent to predict that some crypto coins will explode in the near future, then their claims are meaningless. Don’t get baited so easily!
If you are reading until the end and thinking that the mission to secure a safe financial future is so damn hard – you are right. There are a lot of variables and a lot of traps. Also, a ton of bad people that will give you wrong advice. But if you decide to educate yourself – your future will be bright! Our mission is to support those enthusiastic learners, and we do everything in our power to make this process comprehensive and effective at the same time. So, feel free to join our email list and read our articles regularly. We do our best to provide high-quality information for everyone. See you there!
1) Investopedia.com – How to Set Financial Goals for Your Future
2) robertroloih.com – Interview: How to Retire One Million Dollars Richer?
3) milliondollardecisionbook.com – The free second chapter from the book
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