Tag Archives: savings

What to do: pay off the credit or invest for passive income?

By Smart money, , , , , , ,

Pay off the credit or invest for passive income?

I saved a certain amount of money and I manage to keep saving month by month, what do I do? Do I pay off my credit or invest to generate higher income in the future?

Probably many of you have at least one mortgage loan and/or one or more consumer loans (if you read this article) and at the same time you have started to accumulate some financial reserves and may have thought or even started to put the money to work. In this context, you may also think about the fact that interest rates may rise, a crisis may occur at any time and at the same time you can see the good profits that have been made and are made from real estate investments, stock exchange, cryptocurrencies and business.

In all this context, it is normal for the answer to the question to pay the credit or invest the money to be complex, with many variables and uncertainties, but also so important. Basically the answer can guide your financial strategy for several years.

Let’s begin!

Before I should ask myself if I pay the credit or invest, there are some things we have to check:

  • If there are debts from credit cards and overdrafts with interest rates above 15% -20%, those should be paid before we think about investments;
  • Consumer debt, car etc. – we should focus on them and pay them in advance before investing;
  • We fail to save constantly – focus first on building this habit;
  • Reserve fund to cover living costs for a period of 6-12 months.

Before you have all the above checked, you should not even think about starting investing.

Any consumer credit used for the acquisition of liabilities should be paid as a priority. Real estate and investment loans (those used to purchase assets) are the ones we can doubt whether we will pay them in advance or not.

We will talk specifically about real estate loans, to simplify and make the analysis relevant, but we can have the same analysis process in the case of a non-real estate investment loan.Well, now the question that remains is: Do I pay the real estate loan or do I use my future reserves and savings for investments?

Economically speaking

From an economic point of view, we will compare the actual effective interest rate of the loan with the expected net return on investments.

For example, we have an interest of 5% on the mortgage loan and

a  return estimated by us of 10% of the investment in shares (historical average yield)

or

we find an apartment at a very good price and with a rent yield of 8%

or

bonds with 9% interest

and so on….

So we have on one hand a 5% safe interest vs. a yield estimate of 10% or 8% or 9%.The decision may seem obvious – at such a yield differential, in 20-25 years you pay the property 2 times.

But the decision is simple just at first sight and it becomes more complex when we go deep. Why? Because the interest rate on credit is safe (if it is 5%, it is 5% no matter what I do) while the return on investments is always an estimate.

Estimate because:

  • The stock market may no longer perform in the next 10 years as in the past or you catch a very weak interval;
  • The yield on the rental property may decrease, or it may not be at all, unless you have a tenant or you find a structural problem of the construction;
  • The issuer of the bond can go bankrupt and you lose all the money.

There are risks that you must take into account to adjust the returns on investments with the percentage of risk. Professionals always calculate their adjusted return on an investment. The calculation is very complex and has many variables. But for the sake of simplification we can estimate a differential for the degree of risk. For example: -1.5% for a very good real estate, -2.5% for small and medium-sized companies bonds and -3% for blue chips shares.Thus, we now have a comparison between + 5% credit payment and (10% – 3% = 7%) for shares; (8% -1.5% = 6.5%) for real estate and (9% -2.5% = 6.5%) for bonds.

Now it’s a little clearer. We know that up to a loan interest rate of 6.5% or 7% we can invest without problems, but if the interest exceeds these levels it becomes more profitable to pay the credit.

Of course, the calculation is relevant depending on how well we made our estimate of future profits.

Many investors and business owners maintain their long-term loans, knowing that they can generate higher long-term returns with the same amount of money. This is the case of many smaller or larger entrepreneurs, it is the case of those who invest professionally or even those who invest passively in the long term.

Obviously, a solution would be to make more risky and / or more active investments that can bring higher returns, but in this case you really should know what you are doing.

Important is to make your calculations as well as you can, because, after all, nobody knows the future.

Psychologically

The need for survival/safety is lower (and stronger) on Maslow’s pyramid than aspirational needs. From here comes a degree of stress that will make you quite conservative in investments when you have unpaid loans.

Emotions are not good in investments.

To make a decision:

  • Do your calculations – see economic analysis above;
  • Calculate your risk profile;
  • What decision would make you unable to sleep at night?;
  • How would you feel about paying off your debts? But what if you didn’t pay them?
  • How would you feel if you invested in passive income? But what if you didn’t invest?
  • How would you feel if you paid your credit with 5% interest and the stock would have a 50% yield that year, which you would not benefit from? But if you did not pay your credit and invest in the stock market, and the stock market would fall by 50% that year? Which of these 2 options would most disturb you?

When choosing whether to pay your credit or invest/accumulate reserves you must take into account both the economical and psychological aspects. Both are important, but more important are the psychological ones, because they have the power to sabotage you.

Finally, if you are still not cleared how to proceed, you can choose the middle way and use the amounts saved according to the formula: Invest = (10 – Credit interest rate) and with the rest pay the credit. That is, if the credit interest is 4% and you save 1000 EUR per month, you pay in advance (or you set aside to pay in advance) 400 EUR and you invest 600 EUR.

Simple, right?

When does it worth to have money in bank deposits?

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Balance inflation

Is it worth having bank deposits? Can you live of the interest you gain?

To these questions, there is no standard answer. The answer is influenced by the size of economies, inflation rate and bank interest.

There were times when interest rates were well above the inflation rate and all people who had savings were directing them into bank deposits. When the bank offers you an interest rate of 18-20% and the inflation rate is 5-8%, the real-positive interest rate is 12-15% and it deserves the investment, right?

Instead, it is not worth having bank deposits when banks offer net interest rates below the inflation rate (banks do NOT need money).
Normally, bank interest rates cover inflation or are slightly below inflation.

In conclusion, it is worth having bank deposits only if interest rates are over inflation rate, otherwise you will only get a reduction in the purchasing power of your own savings!

6 tips for improving your family budget

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Family budget

In order to be able to draw up a budget of incomes and expenses as accurately as possible, it is best to keep our daily records of spendings so we don’t omit anything. That’s why we can use more tools, either to write daily spending on an agenda at the end of each day, or to use an app on your mobile phone that you have at your fingertips at any time, and we can write down the expenses as we perform them, either use an excel file, so we can personalize it to fit our needs better.

  •  A great deal of daily spendings goes on various occasions, such as snacks during the day or city walks to a coffee. Do not omit to keep track of these costs because at the end of the month you will realize that they will weigh heavily in the budget and you will wonder where the difference is.
  •  For a better financial discipline, it is a good idea first to achieve a forecasted revenue and expenditure budget and then to draw up the budget actually made to figure out what is the difference between estimates and reality, and so you can improve your financial behavior. The forecasted budget can also be considered a target for your budget and try to fit into it.
  • Every month, the first expenses we have to make are the ones for our future, this are the sums allocated to savings and investments. After making sure that we first saved the amounts proposed, we can only then make the fixed costs that if we omit them in a month they will attract interest and penalties. Finally, we can allocate the difference for variable expenses.
  • As with fixed costs, to ensure that we do not postpone savings by the end of the month to see if we still have resources available for them, we can set automatic payments to our savings or investment accounts and so we will have better and better financial results.
  • To ensure that unforeseen expenses do not affect your monthly budget, it is advisable to have an emergency fund of at least 3-6 salaries that you can use only in emergency situations. This way, you will surely know that no matter if your car breaks down or you have an urgent medical problem, you will be able to resolve it without borrowing or delaying until you have the financial resources to solve the problem.
  • To improve spendings, try to divide them into expenditures that represent needs and expenses that are wishes. Start budgeting all the time by analyzing your wishes and see which ones can be eliminated for better long-term results.

Ultimately, the purpose of our revenue and expenditure budget is to manage our financial resources more efficiently. It is important, after realizing the family budget over a period of several months, to analyze its evolution in order to improve our financial behavior in terms of cost reduction in order to save more and ultimately invest in order to reach our established financial goals more quickly.

4 ways to save money for investing

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Something we hear time and time again is “I would love to start investing, but I don’t have any money”. By human nature, we are at times reluctant to change, especially when it comes to parting with something we hold so dear such as our money. When you hear your friends or that rich uncle of yours talk about their investment portfolio, know that everyone has started somewhere and the most critical thing you can do is to get started. But how can you actually save money each month for investing?

If you’ve reviewed your monthly budget and you still don’t think you can start, here are 4 things you should consider.

1. What are you planning to invest in?

Firstly, you should think about exactly what you want to invest in as this will determine how much capital you need to get started and also how you can get there. For example, if you are choosing to invest directly in to real estate then you will need quite a considerable cash amount available. Not to mention, you will needed further capital available for repairs, maintenance and any related fees for agencies, insurance and legal.

If you’re investing in securities, P2P or something similar, it’s likely there will be a minimum investment amount required but significantly less than real estate. Once you know how much you need to get started, you can move on to the next step.

2. Refinance existing debt

If you’re in a situation where you have absolutely no debt then you can skip past this one (and congratulations!), although statistics show that the average debt per person in the UK is £8,000, with the highest debt-to-income ratio in Europe seen in Denmark. Start with your largest debt, i.e. your mortgage, and check if you are getting the best interest rate available. Your property may have increased in value since you last checked and therefore your equity will have increased, this is usually the single most important factor for a bank when determining the rate they can offer you. Another common debt is a credit card; today there are a number of providers offering 0% interest rates for 12 months and over if you complete a balance transfer to them. Take advantage of these fantastic offers while they are available and use them to pay off your debt quicker, smarter and free up further income for investing.

3. Pay yourself first

Before you pay any bills (or anything at all for that matter), you should always pay yourself first. The day you get paid, you should set aside a minimum of 10% of your net salary to pay yourself and use the funds for investments, then you can focus on your bills and everything else. Once you get in to the habit of doing this, you may find that you choose to up your monthly percentage that you invest to 20%, even 30%, because it can be extremely motivating once you start to see your money work for you and generate interest.

4. Make some cutbacks

You don’t have to give up your car or downsize your house, but we’re certain that you can think of a few things you pay for each month that aren’t really necessary. What about that gym membership that you never use? Maybe you have a subscription to a magazine or a set of TV channels? The little things add up, so make a list of all the discretionary expenditure you have each month and you’ll be amazed at what you find.

Source: www.bondora.com

Savings can help you in the world full of risks we live in

By Smart money, , , , ,

We all live in a world full of uncertainties. Everything that surrounds us – nature, people, things – is in constant transformation, and the result is beyond the limits of our knowledge.
But our economies could be a solution (at least partial) to this problem.
Why? The answer is simple: in situations where we are confronted with many unknowns, over which we have no control, a good idea would be to act in the directions in which we can really do something.
For example, in terms of personal finances. Because money is a mean by which we have been taught that we can interact with the world around us.
So many of the things we need, or the problems we face daily, can be attained or even partially resolved with a certain amount of money, so we might be tempted to believe that ALL our problems would instantly disappear if we had enough money.
A totally wrong perception, for the most important aspects of life really have nothing to do with the notion of money.
But many other things really are related, which is why we are in danger of generalizing …

How can we increase our savings?

By definition, savings are the difference between what we get and what we spend. So, first of all, we could try to act on revenues. We all know that it’s not easy to increase our income, but at least we have the certainty that we know it. I mean, to a certain extent, we can rely on it.
Then, secondly, we can act on spendings. Of course it is not easy, but at least here it depends on us to a greater extent. And if we correctly correlate earnings and revenues, we’ll start to see how savings are gathered.

How can our savings help?

First of all, savings will bring a sense of control into our lives.
Beyond the countless things we CAN NOT influence in any way, the fact that we can act on our personal finances is a positive thing. And when this money control even produces results and we see savings as it accumulates, then we make clear progress towards increasing our safety.
But not only that, our economies influence our lives more directly.
A study made in the US showed that in the years of the last economic recession, 46% of those actively saving said that they were comfortable with their financial situation. Unlike them, 37% of those who did not save said they had to reduce much of their spendings to make it. Clearly, some people manage their money more efficiently than others.
The fact that you have some money set aside and, in fact, in order to live, you need a lower income than you have, it gives you the opportunity to keep your lifestyle even in unfavorable economic conditions. Due to the fact that the option not to put money aside for a certain period (or even to spend from existing economies) does not exist for those who are not accustomed to constantly saving, they will be more affected by any negative changes may occur at some point.
Those who make savings will be less concerned about unforeseen events and will have the ability to make it easier. What is even more important is that they know this, and that gives them a sense of security that no matter what may appear, they can do it.
Also, those who make savings set goals that they want to achieve. They know it’s more financially advantageous to raise money to go on vacation, for example, than to make a loan for that.
For them, savings are an integral part of their life, and the moment they reach their goal is a positive stimulus.
Unlike them, those who are not preoccupied with their economies, even if they get to put something apart, will do so because the fear of unpredictability, not because they are accustomed to do so.
Especially during recessions, economies help foreseeable people to be better prepared and less affected than others. And due to the fact that there will probably be other recessions in the future, maybe it would be a good time to think about your savings.

Also, as inflation is already becoming more and more clearly felt, maybe it would be a good idea to inform yourself about ways to invest your savings so that in the long run you can get profits that go beyond at least the rate at which your purchasing power decreases.

6 tricks to negotiate a smaller rent and be a winner

By Real estate, Smart money, , , ,

Are you looking to rent an apartment, a studio or a house and want to get a monthly rent as small as possible? Then the tips below will definitely help you when you negotiate with the owner of that building.

1. Do the research. Study the market.

You need to know at what prices are rented other similar buildings in the area.
And when I say: to know at what prices are rented, I do not refer to the price displayed on real estate sites, but the actual amount the tenant pays after negotiating with the landlord.
This will take you some time. I know that. However, in order to be able to negotiate effectively, you need to have enough valid arguments at hand in negotiating with the owner. Of the two of you, the one who comes up with the strongest arguments will win.
If you do not like it or do not have the time to sit and study the market, you can call a real estate agency in the area, to come a real estate agent with you, inspect the apartment you want and help you in the negotiation process.
An experienced real estate agent has much more knowledge than you could get from watching a few housing deals. However, consider that, in this case, you will also have to pay a commission to the real estate agency. But do not worry about it. Think of it this way: if eventually all the parties involved win, that’s all that matters.

2. Count on honesty

Mutual trust is an important factor in the long run if you reach an agreement with the owner and sign the rental agreement.
That’s why, when the negotiation process takes place, do not fall in the temptation to use false informations, in order to make the owner take decisions that favors you. If he feels like you are trying to force his hand, he will withdraw from the bargain and look for another client, and you will have nothing to gain from the whole process.
The reverse is also valid. If in the bargaining process you feel the owner is trying to bloom things so they seem much better than they are in reality, it’s time for you not to get tired anymore. Signing a contract with a liar owner will only bring long-term additional headaches and is not worth it.

3. Treat the man in front of you with respect

Try to keep a constant attitude throughout the negotiation process. If you annoy or offend the owner, or do cynical affirmations, you will not look smarter and will not be able to turn back the situation in your favor.
Look at the situation also from the owner’s point of view. Respect his opinion, because you want, in turn, for him to respect your point of view.

4. Go on the win-win idea

Think that if you come to an agreement in the long run, both you and the owner will win: you will pay a lower rent and he will not have to lose time constantly running after new tenants .
So when negotiating, do not try to win all your battles. If the owner gives up something, when you talk about a particular aspect, give up on yourself when you negotiate another aspect of renting the building.
If you can give more rents as an advance from the beginning, it can be a great asset for you. So, in the eyes of the owner, you are perceived as a trustworthy tenant, without any financial problems, which will not make for him every month’s trouble when it comes to paying rent.
At the same time, the bigger amount you give him from the very beginning can make him look so much to be willing to offer you a lower rent than he would have initially wanted at the beginning of the negotiation.
You can also, in return for a smaller rent, to renovate his apartment or fix some of the faulty things in the apartment.
Also, if you are good at something and the owner needs that service, you can try a bargain: for the amount that reduces the monthly rent, you will provide services periodically, in the field you are skilled in.

5. Whatever happens, stay calm

When emotions are involved, and each one holds at their point of view and are not willing to change it, then negotiation becomes almost impossible, and a conflict is reached rather than an amiable understanding.
The higher the tension between the two parties, the more likely the two parties to sign a lease contract decreases. That’s why, although I know it’s hard, in a bargain you have to look at everything “at cold”.
Detach yourself from emotions and try to look at the whole situation from the outside, from both angles – the owner and the tenant.
This will give you a clearer perspective on the whole process, and at the same time it will be easier for you to keep calm, compared to the situation where you see this whole transaction as a matter of life and death.
Also, even if you are desperate to rent that home, do not show you’re desperate desire even if:
– You know that tomorrow you do not have where to stay and you will sleep under the free sky or
–  You think you cant’t find a home like this anymore even in your most beautiful dreams.
The more you are desperate to become a tenant in that building, the more the owner will “smell” you more easily and will get harder in the negotiation process.
As I said earlier … leave your feelings home.

6. Do not let yourself intimidated

Do not rush to make the decision to rent the house at the price proposed by the owner, depending on events such as:
– as you visit the apartment, there are other potential customers who have also found themselves to watch it at the same time as you. Most likely, it’s a “production”, meant for you to rush to make a decision.
– while the landlord shows you the home, his phone rings and the alleged clients at the other end of the wire makes him to come back to you and say, “So what is it … you’ll take the apartment or I will talk to the customer on the phone to come and see it?”

In conclusion: when you start the negotiation process for the monthly rent in that building, remember the advices above and you will be much more satisfied with the outcome of the negotiation.

 

The 12 “tricks” to make savings

By Smart money, , , , ,

When it comes to money, saving is not my favorite subject. I prefer revenue growth!
However, saving is extremely profitable, because every money you save in a project is pure profit.
Revenues are taxed. Cost reduction, no.
Consequently, it is worth talking about ways we can make savings. We have selected 12 such ways for you.
This is my favorite list of “tips and tricks” when it comes to saving money:

1. Make short-term savings goals: for example, 20 EUR a week or something of this kind.
You will be more successful with such goals than with long-term ones (6 months or one year).

2. Get used to picking up the small pocket every time you change your home clothes and put it in the same place (jerky jar, etc.)

3. When you want to buy something, do not just think about how much it costs, but how much you have to work to pay for that object.
This will help you to see things more clearly.

4. Go shopping with the list and keep up the list.
There is not much to say here. Just do this a few times and draw conclusions. ?

5. Walk.
It’s healthy.
However, it would be desirable to do at least 10,000 steps a day, and if you sit in the office, you make between 2000 and 40000 steps.
If the journey to the office takes less than an hour (6-8000 steps), it would be interesting to reduce your transportation costs while increasing your health benefits.

6. Are you sure you need all the space you live in?
You may be in favor of this …
It is possible that a better arrangement of your home will save you 100 euros per month (for example).
In 10 years, that means 12,000 euros, without taking into account any interest.
With an intelligent investment strategy, it could easily be 20,000 euros.
Could you get that money in 10 years?

7. If you have a property do a calculation in terms of investment in thermal comfort for 10 or 20 years.
You may find that investing in thermal insulation or a smart heating solution can save you thousands of euros in the long run.

8. Buy clothes on two criteria: price and durability, not just price. A shirt that is ruined after two wears is a bad deal, no matter how much it cost.

9. Renegotiates the price paid for telecommunications (telephone, internet).
As technology progresses, costs in this area are going down. As a result, most people pay extra money because they do not renegotiate their contracts.
Do not miss this opportunity!

10. Be careful to look before you have fun!
You can find excellent prices when it goes to trips. If you plan ahead and compare multiple offers, you can find incredibly convenient prices.

11. Plan your gifts!
On the same idea as in point 10, gift planning can relieve you of unnecessary expenses. The most beautiful gifts are the right ones, not the expensive ones.
But, to fit a gift with the recipient, you need to think about it a long time ago.

12. Learn how to save – that is, studying the money!
A single idea like the above, that you learn and apply, can save you tens of thousands of euros over the years.

The most beautiful part?
Any of these ideas can be transformed into life-habits – which means they become automatism and, as a result, they no longer consume energy, but they bring you money.

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