MYTHS AND FACTS ABOUT OUR RELATIONSHIP TO MONEY: WHAT HINDERS OUR FINANCIAL SUCCESS?

27.12.2017

Money is a sensitive topic associated with many myths. Among the most frequent are the following: money should not be saved, but it needs to be spent right away, low income = eternal poverty, but also investing is expensive and risky, so it needs to be avoided. Personal finance experts from PARTNERS GROUP SK believe that these myths are the reason why we are not financially successful. They suggest how to refute them and set up healthy finances.

WE EARN, BUT OUR APPROACH TO MONEY IS WRONG

We have a very specific approach to money in several perspectives. On one hand we are hardworking and able to earn money, but generally we have wrong approach to it. We do not create a sufficient emergency fund, we do not create long-term assets and we underestimate future planning. We spend money to repay debts, loans and excessive consumption. The reason for this is insufficient financial literacy.

SAVING IS NOT RESTRICTING

Many people perceive saving as restricting something, the purchase of which could make their lives more enjoyable. According to experts it does not have to be like this. If you understand how finance works, there is no need to restrict anything. We just need to realize what our relationship to money is like and how to treat it. Do you not understand money and pay interest for the entire life, spend more than you can afford and purchase almost everything on loan or lease? If you answer is positive, there is a risk that in case of any unpleasant life event, such as damage of non-insured property, illness, long-term loss of employment or death of a relative, there will be executions, which can ruin your family budget. On the contrary, those who understand finance will have their income and property insured, create an emergency fund and capitalize on compound interest in profitable investing.

THE POOR HAVE MORE DEBTS, THE RICH SEEK ADVICE

Why some people are, as they say, poor for a lifetime and others thrive? According to experts it can be attributed to a mess in revenues and expenditures, low financial literacy and insufficient discipline. According to surveys, the financially poorest tend to borrow most. While just a single mistake is enough, when one does not evaluate correctly his/her own capacity to repay, gives way to commercials and borrows more than he/she can handle. However, there is also a group of “the poor”, who have never borrowed, but they hold all their savings in a bank and inflation depreciates them. This happens if yield is lower than inflation. Rich people, on the other hand, always know their numbers – revenues, expenditures, have higher financial literacy, often seek assistance from professional advisors, plan their finances, capitalize on compound interest in financial products and seek information on investment opportunities that they actually take.

KNOW YOUR NUMBERS

A net income of EUR 1,000 can be already considered as decent. And how should one work with such money? First of all, one needs to know his/her own numbers and track own revenues and expenditures for at least three months. Set financial goals and priorities regardless of the income amount. When determining priorities it is important to protect your own income, create an emergency fund, protect property by insurance and indeed create assets for retirement. It is necessary to consider the rule of optimal financial proportions of 10:20:30:40, according to which we allocate 10 % of a monthly income to create an emergency fund, 20 % to create long-term assets and investments, while loans should remain below 30 % of income threshold and up to 40 % of income should be used for common consumption.

RECIPE FOR FINANCIAL SUCCESS

There is no universal recipe for financial success. However, by setting and following basic rules for personal finances we can achieve their consolidation and subsequently build interesting capital. Experts from PARTNERS GROUP SK suggest to everyone who wants to be financially successful to be persistent, disciplined, to improve their financial knowledge and establish correct habits.

Such habits include:

Being in contact with a professional who brings an important objectivity to the entire financial planning process.
Creation of an emergency fund, which is a key to healthy personal or family finances and should be at least in the amount of six times the monthly income
The right combination and regular updating of life and non-life insurance policies, because the amount of income as well as property and expenditures change over time. It is the policies that should protect us from eventual adverse life situations.
Regular investments with a reasonable investment risk directly related to the investment horizon

BEWARE OF THE MOST COMMON MISTAKES

Do not stake all investments on a single card, diversify investments and ask what you invest in.
Do not resist advice and assistance by professionals
Do not neglect updating and servicing a financial portfolio, regularly check, whether contracts protect your property sufficiently and whether they reflect current status
Do not underestimate creating an emergency fund (at least six times the monthly income)
Do not conclude a contract you do not understand. Research all available information
Do not forget to expand your financial knowledge regularly
Do not be controlled by emotions in investing and be more interested in investment possibilities. You cannot get rich without quality appreciation of money. Moreover, the appreciation time frame is more important than the invested amount
Do not rely solely on information from Google. For financial products you need a higher level of financial literacy, you need to know where and how to find objective information