7 Golden Rules of Financial Planning
1. GET RID OF EXPENSIVE DEBT
Money borrowed in an expensive way will drain your wallet in a flash. It has been repeated over and over that loans taken out to buy non-essential things, in other words – things you can live without – turn out to be the most expensive ones. It will take you a year or two to pay off a week of vacation. You find out as early as two months into it that it was not worth it, and you will become more and more aware of that over the period of the next twenty-two months. While purchases charged to your credit cards may make you feel glamorous, paying them off is going to prove really difficult.
2. CREATE A FINANCIAL SAFETY NET
Everyone should create an emergency fund to cover the cost of running a household from which they can draw in case unexpected expenses arise. Charging a new TV or a washing machine to replace a broken one to your credit card or taking out a loan to cover the expenses is a costly thing, as discussed in rule No. 1.
The emergency fund should be in an amount sufficient to cover six months of expenses associated with running your household. A good idea is to deposit the emergency funds into a savings account, which leaves them immediately available in case of an emergency.
3. FIND GOOD AND AFFORDABLE INSURANCE FOR YOUR FAMILY AND YOUR POSESSIONS
Czechs are said to be “cautious”. But they are not cautious in the right sense of the word. Being cautious means to protect oneself against unexpected events, in other words – to have a high quality and affordable insurance plan. And that goes both for one’s property and one’s health.
When considering the insurance of their health, the Czech people particularly forget about the disability insurance. Notably, people with higher income and entrepreneurs should not underestimate taking out disability insurance for any reason.
4. FIND A WAY TO PURCHASE YOUR OWN HOME
In order to be able to purchase your own home today, you have to meet a lot of requirements. The principal one is to have a minimum of 20 % of the purchase price of the property available. Other conditions include the amount of the mortgage applicant’s debt should not be more than the ninefold amount of the applicant’s net annual income, while at the same time the applicant should not spend more than 45 % of their net monthly income to cover the mortgage payments. That is why purchasing one’s own home takes long term preparation and financial planning.
After the debt is paid off, the homeowner’s living expenses drastically decrease in comparison with a renter’s. That is the reason why purchasing one’s own home should be one of the priorities.
5. REGULARLY INVEST IN PROFITABLE STRATEGIES AND DO NOT VENTURE
Czechs enjoy financial security, and yet they have long been underestimating the necessity to stockpile resources for old age. The state funded retirement pension is a very vague variable, which is a reflection of the changes happening over the last quarter of the century. The only way people can get a guarantee is if they create their own retirement funds.
Regular investments are a suitable tool for creating a monetary reserve in the horizon of tens of years. Time is of the essence when it comes to increasing the value, which means the sooner you start, the more affordable the process is going to be. It is optimal to put aside several thousand crowns monthly. If you do not take any chances and regularly invest 3,000 crowns a month over the period of 30 years, you can count on having the amount of 2,089,089 crowns.
6. DO NOT KEEP AVAILABLE FUNDS IN CURRENT ACCOUNTS AND TIME DEPOSITS
According to the latest data, cautious Czechs have over one trillion crowns deposited in their current accounts. Their opposition against the fluctuations and drops in the interest bearing of banking products is borderline remarkable. Even though the accounts do not bear interest, the Czech people just leave their money sitting there. That is because they feel like their savings are the safest when deposited into a savings or a current account. But are they truly that secure? Money in current accounts is hardly bearing any interest, and therefore it loses its value every year due to the existence of inflation. Therefore, Czechs voluntarily accept losing their money because they are convinced they are protecting it.
7. OPTIMIZE EXPENSIVE PRODUCTS
This advice relates to the purpose of the individual financial products in particular – in other words, to the reasons why you have taken them out. Just as are the reasons, of equal importance is the correct set up of your options to ensure the products truly have the ability to insure you and overcome problematic times. For example, insured risks such as disability or death covered by hundreds of thousands of crowns do not necessarily have to be sufficient. In case of an insured event, i.e. death or permanent disability of the family’s breadwinner, they will not provide the long-term permanent assistance needed in those situations. Coping with events like that is a matter of years, and therefore millions of crowns. The same applies to underinsurance when it comes to homeowners’ or household insurance policy. In case of an insured event, the insurance company will cut the insurance benefits by tens of percent. Insurance products that are not set up correctly cost you, even though it may not be immediately obvious, a lot more in the end because in case of an insured event you realize how much more you end up paying for those products due to the fact that they did not cover everything they should have covered.