FINANCIAL PLANNING

To become financially independent, it is essential that every year we review our financial health, set bold goals or revise previously set ones, and at the same time set the groundwork to start or continue to move quickly to achieve the results we want.

Financial independence is 20% science and 80% educated behavior.

Dave Ramsey

Create an annual financial strategy and implement it monthly, consistently, if you want to do well!

3 reasons why people have financial problems

Poor or no planning

I save too little or not at all

Have poor personal budgeting habits and use credit indiscriminately

Does everyone have the same financial plan?

or

2 smart moves you could make to keep your money around

Make your strategy for achieving your goals areality by saving constantly.
To increase your Personal Net Worth from one year to the next, in line with the minimum threshold recommended by specialists for your age.

IMPROVE YOUR MOST IMPORTANT FINANCIAL NUMBER

To be rich you don't have to have a huge income!
Experts say that one of the first goals you can have to become financially independent is to aim for a high Personal Net Worth, not just a high income.
In concrete terms, you should aim to earn more than you spend and have a Personal Net Worth above the standard threshold for your age.

How do you do it?

Simply.

You could aim for an annual increase in Personal Net Worth of between 3% and 100%.

To increase your Personal Net Worth, it is recommended to increase your assets, decrease your debts, or rather, both approaches.

The quickest way to increase your assets is to increase your voluntary pension contribution. That's because the money you put into a Pillar III, for example, can grow without you having to pay tax. At the same time, you can get a slightly better return than you would with exactly the same contributions in a standard investment fund. In addition, contributions into traditional pension accounts are tax-deductible, so you can use the money you save in tax savings to boost your Personal Net Worth further.

In other news, getting out of debt is a worthwhile goal for many reasons, especially if you have a lot of costly credit card debt or other high-interest debt. In fact, getting rid of high-interest debt is a higher priority than increasing your pension contribution, because the interest you pay on the loan you're taking out will most likely cancel out the returns you earn on your retirement savings.

Reference model for Personal Net Worth growth strategy

Research shows that you don't have to have a high income to be rich.
Experts say that one of the first goals you can have to become financially independent is to aim for a high personal net worth, not just a high income. In concrete terms, you should aim to earn more than you spend and have a Personal Net Worth above the standard threshold for your age.

In other words, you could become a Prestigious Wealth Accumulator if you plan and follow the above formula exactly.
Chances are it will work out the way you want!
However, keep in mind that this is a mathematical calculation, and life is complex and can be challenging.

If you decide that it may be important for you to start growing your personal net worth, then, if you think it's a good idea, you could aim to grow your net worth accordingly, every year, until you reach the age threshold in the formula above.

INITIATIVE TO INCREASE PERSONAL NET WORTH

Let' s assume you are 40 years old, have an annual income of 99,000 MU and your PNW is 196,000 MU. You're doing slightly better than average, but you really want to get your net worth up to where the net reference value formula says it should be, at 396,000 MU. So you would have to increase your net worth by 200,000 MU to get to where you want to be.

Assuming that you could have a credit card debt of 5,000 MU with an interest rate of 12.1%, and the only larger debt being a low-interest mortgage, the first step in your growth plan would be to get rid of your credit card debt within 1 year maximum. Specifically, if you pay 400 MU per month on your credit card, in addition to the minimum payment, you will pay it off in 11 months. Spread the extra 400 MU over your credit card, reducing your outgoings, and get your repayment in the time you want. For this first personal victory, it would be preferable to reward yourself for reaching your first goal! :)

Now, once you've set your desired number, you can set a timeframe and mini-goals to get you to your big goal, no later than the deadline. In this regard, your plan could be as follows: You want to increase your PNW by 200,000 MU and you have decided to set a timeframe of 15 years.

This way, you get 400 MU saved in your personal budget every month. This could be the contribution rate for a new pension contract. Assuming that you now have 20,000 MU in pension savings and have so far contributed only 100 MU per month, increasing the contribution to 500 MU per month at an average annual return of 7% would result in a pension savings account balance of 196,345 MU over the 14 years.

Of course, you will continue to repay the mortgage over the same 14 years, but this should be more than enough to achieve the desired PNW, even if the value of the home does not increase at all.

My Financial Plan

PNW worldwide

But how is it possible to get these numbers?

2 principles of utmost importance

The cumulative power of money
The power of (very) long-term savings/investments

The most powerful force in the universe is compound interest.

Warren Buffett

The time value of money implies that a given amount of money is worth more today than the same amount of money in the future because of its ability to produce a return.

In other words, if today you have a sum of money that you can invest in instruments that can earn you a positive return (in a bank deposit, in bond, bond or equity funds, in shares, etc.), in the future this sum will be worth more.

Compound interest is a non-linear progression, whereas simple interest (without compounding/reinvestment) is linear.

As the time period increases, we see a large to significant difference between simple and compound interest.

In other words, compounding, or compound interest, is a mathematical expression whereby the interest on a deposit or savings account that accumulates at the end of a 12-month period is reinvested along with the initial deposit for a further year. In the case of investments, where the asset is a share or a bond, the mechanism is the same except that the profit or coupon is reinvested.

Many people think retirement is too far away to think about saving for the long term.

Young people in their 20s and 30s are not thinking about saving for their 40s.

Almost 2 out of 3 Romanians, i.e. 60%, claim that they cannot save anything from what they earn, with a net salary of more than 2500 MO - i.e. at the average salary level. Although the minimum wage has steadily increased in recent years, people's attitudes have continued to worsen, with 34% saying in 2019 that they regularly save part of their income, compared to 45% in 2018. Unfortunately, this is a consequence of a lack of financial education.

Source: sociological study conducted by ISRA Center, commissioned by the Association for Privately Managed Pensions (APAPR) in 2020.

Mandatory pension fund în Romania can substitute income equivalent to just 31.8% of the last salary earned before retirement - this is the standard to which the level of pension earned by a Romanian after so many years of work is measured. In addition, by saving in Semi-mandatory pension fund*, which has only existed in Romania for a little over a decade, people can cover another 13.6%. This brings the Mandatory and semi-mandatory pension funds savings to a replacement rate of 40.6% of final salary.

*Semi-mandatory pension fund has been set up since 2008 for all young people who meet the following conditions: they are under 35, have a valid employment contract and are insured under the public pension scheme.

Source: Study conducted by financial analysts from CFA Society Romania.

This leaves a significant gap until the OECD-recommended 70% income replacement level, which will be covered by individual savings.

Semi-mandatory pension funds, of privately managed pensions, was launched in May 2008 and has so far delivered an average annualized return of 8.35% for its 7.46 million participants, representing a net gain of more than 12.8 billion lei (€2.68 billion). Thus, more than 2.1 million Romanians have already reached sums of more than 10,000 lei in their Pillar II pension accounts, after administrators achieved an average return of 11.8% in 2019, according to APAPR data.

Optional pension funds, launched in May 2007, has just 501,000 participants and net assets of €524 million, with an average annualized return of 6.46%.

Detalii Pilon II

Detalii Pilon III

If your (very) long term plan includes increasing your quality of life or maintaining your current standard of living until after retirement age, you could apply for...

20/20 rule

To save for retirement, start saving for 20 years of retirement at least 20 years before you retire.

240 rule

Suppose you set a goal of having 100 MO more than your state pension every month for as long as you live after you reach retirement age at 65. Multiply the monthly amount by 12 months. You will get 1,200 MO in one year. You then multiply this result by 20 years (assuming you will live about 20 years after retirement), which gives 1,200 MO x 20 years = 24,000 MO. In other words, you multiply the target monthly amount by 240 (which results from the equation 12 months x 20 years). So, in order to receive an extra 100 MO on top of your state pension during your retirement, you should have 24,000 MO in financial liquid assets at the age of 65, which you can quickly turn into cash (in cash) if you need it. At a rough calculation, if you want an extra 1,000 MO per month on top of your state pension, you should have 240,000 MO by the time you reach 65. The estimate takes into account the general forecast that we will live for about 20 years after the age of 65.

It's good to know that in Romania, women have a life expectancy of about 24.8 years, while men have only about 19.3 years after the age of 60+.

Sursa: Longevity impact on the life annuities of Romania by comparative analysis with Bulgaria and Hungary, Journal „Financial Studies'', Anghel L.C. și Solomon I.C., Volum 19, nr. 2A, 2015, pp. 9 – 27, publicat de Academia Română și de „Victor Slăvescu” Centre for Financial and Monetary Research, ISSN 2066-6071, ISSN-L 2066-6071.

Life expectancy is increasing. Very soon people will be retiring later... so we'll be working longer.
Calculations by specialists show that every day, the life expectancy of a Romanian increases on average by 5.2 hours. Those born now will live more than 41 years longer than those born a century ago, and this has strong economic implications... from providing resources for living to maintaining living standards after retirement age. I can speculate that we may well have to put money away 40 years before our supposed retirement age.

Warren Buffett used to say that you can only get rich if you wake up richer than before you went to bed. The essence of this advice is to accumulate extra income from regular investments, reinvesting interest, dividends and profits so that by earning interest on interest (compound interest) you accumulate financial wealth every day. The longer you are able to save over a longer period of time, the greater the impact of compound interest (interest is also added to the interest earned in previous years that has been reinvested; in the case of deposits, this is called compounding).

> Financial Targets

> Personal Budget

Sources:

The Millionaire Next Door: The surprising secrets of the great rich Thomas Stanley, William Danko

Global wealth databook 2021, Credit Suisse, www.credit-suisse.com
https://www.worldometers.info/world-population/romania-population/
https://money.cnn.com
https://euro-area-statistics.org

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