The FinKratt Roadmap

FinKratt: inspired by myth, driven by purpose. We’re a digital tool helping you break free from living paycheck-to-paycheck, using personalised budgeting and strategic financial roadmaps.

Level 0

1. What is level 0 and why is it important?

Level 0 lays the groundwork for your financial journey. It’s about auditing your financial status, studying the FinKratt Roadmap and planning your approach according to the FinKratt Cash-flow system. More importantly, Level 0 also entails fully committing to the principle of Debt Zero.

This stage involves understanding your income, expenses, debts, and obligations as much as possible, and it’s critical for setting a clear financial baseline and deciding how to allocate and segregate resources efficiently across Needs, Wants, and FinKratt.

2. What is financial reflection and how to do it?

Financial reflection is where you dive into your overall financial situation and fully understand your spendings. You would need to understand where is your money going and why. Are there any surprises regarding this? How does it make you feel? Would you like to change something?

While it’s important to dive into your spendings, it’s also important to understand your income. It’s common not to be entirely satisfied with your income’s size, so consider the possibility of augmenting it. What would it take to increase your income, and what effort might be involved?

Importantly, recognise that potential gains might come with hidden costs, such as sacrificing time with loved ones, reducing physical exercise, missing out on social events, or cutting back on entertainment. Reflect on what truly matters to you and contemplate if allocating more time to activities that could boost your income would actually benefit you.

3. What is meant by Needs?

When it comes to personal finance, ‘Needs’ refer to the essential expenses that are necessary for day-to-day living and maintaining a basic standard of life. These typically include costs such as housing (rent or residential mortgage payments), utilities (like electricity, water, gas), groceries, and transportation. Other Needs could be healthcare, childcare, among others. Fundamentally, Needs represent the expenditures vital for survival and basic comfort, with their absence potentially resulting in severe adverse effects.

What aren’t Needs? Expenses that fall outside the category of ‘Needs’ are typically those that are not essential for basic survival or mandatory obligations. This includes discretionary spending such as entertainment, dining out, luxury items, etc. These are often categorised as ‘Wants’ – expenses that contribute to a higher quality of life but are not vital for day-to-day sustenance and functionality. Moreover, savings and investments (FinKratt) are also not considered as Needs, as they are not immediate necessities for day-to-day living.

Why ideally limited to 50%? Limiting Needs to 50% of your income is a deliberate and strategic decision, designed to curb excessive spending on essential expenses. This cap not only prevents the overallocation of funds to basic necessities, but also serves as a safeguard against indulging in unnecessarily expensive options for these essentials, which might otherwise be classified as Wants. By adhering to this limit, you effectively leave sufficient space for your Finkratt, while also ensuring availability for life’s enjoyable extras (Wants).

What if your Needs are over 50%? If your Needs happen to consume over 50% of your income, the situation calls for a careful reassessment and potential restructuring of your expenses. Your primary focus should be on exploring avenues to decrease the cost of your Needs, such as seeking more affordable housing options, reducing utility costs, using public transportation instead of your car, etc. However, if reducing Needs isn’t fully feasible for you, the next step would involve scaling back on ‘Wants’, this is, cutting down on non-essential expenditures to maintain financial balance. In cases where these adjustments are insufficient, consider augmenting your income. This could entail finding a higher-paying job or embarking on a side-hustle to increase your earnings. Regardless of the approach, it’s crucial to maintain at least a 20% allocation to FinKratt, safeguarding your commitment to future financial stability and growth.

4. Wants is meant by Wants?

In personal finance, Wants refer to the expenses that go beyond the basic necessities of life. They are the non-essential purchases and activities that contribute to leisure, enjoyment, and overall lifestyle enhancement. This category typically includes spending on entertainment, dining out, luxury items, vacations, and hobbies. Wants are the enjoyable aspects of spending that, while they make life more pleasant and fulfilling, are not essential for day-to-day survival or functionality.

What aren’t Wants? Wants do not include the essential expenses necessary for basic living (Needs) or the allocations for future financial stability and growth (FinKratt). Unlike these two categories, Wants are primarily aimed at providing immediate pleasure and enjoyment, rather than fulfilling fundamental necessities or contributing to long-term financial objectives.

Why are Wants allocated from the leftovers? In the FinKratt Cash-flow system, Wants are financed from the remaining funds after allocating for Needs and FinKratt. This prioritisation ensures that essential living expenses and future financial security are not compromised for the sake of immediate gratification. By addressing Wants with the remaining funds, the FinKratt Cash-flow system encourages responsible and balanced financial planning, ensuring that the enjoyment of life’s pleasures does not hinder essential spending or long-term financial goals.

What if your income leftovers are not enough for your Wants? If your desires for Wants exceed the available funds after catering to Needs and FinKratt, it will require a reassessment of these discretionary expenses. The first step is to critically evaluate your Wants, distinguishing between genuine desires and impulsive indulgences. If the spending on Wants is consistently exceeding your budget, it may be necessary to scale back on these expenses or find ways to enjoy similar experiences at a lower cost. Alternatively, as with managing excessive Needs, exploring additional income sources, such as a side job or freelance work, can increase the available funds for Wants.

5. What is meant by Finkratt?

FinKratt is the dynamic portion of your income allocated for powering you through the Financial Roadmap Levels. It’s your companion to building wealth, reducing debts, and preparing you for your future financial goals. Named after the mythical Estonian Kratt, known for its diligent and productive nature, the FinKratt embodies the principle of keeping your finances actively engaged.

Why a minimum of 20% for FinKratt? Allocating a minimum of 20% of your income to FinKratt is advised to guarantee a substantial and steady investment in your long-term financial aspirations. This guideline serves to establish an equilibrium: it’s substantial enough to significantly influence your financial future, yet remains an attainable goal for various income brackets. Importantly, this 20% is just the starting point; depending on your financial situation, there may be a need or opportunity to increase this percentage. The flexibility to adjust upwards ensures that you’re not only meeting a basic standard for future security and growth but also maximising your potential for financial advancement, affirming a commitment to not just the present, but also a well-prepared and prosperous future.

What if you can’t afford the minimum 20% for FinKratt? In situations where allocating 20% of your income to FinKratt is currently out of reach, it’s acceptable to start with a lower percentage. However, this should only be a temporary measure, not an end goal. Your aim should be to work diligently towards meeting—and even exceeding—the 20% benchmark. It’s true that contributing something is better than nothing, but the true objective is to reach that minimum threshold as soon as feasible. To accomplish this, you might need to employ various strategies. Firstly, reassess and streamline your Needs and Wants. This could mean finding more affordable living arrangements, or temporarily cutting back on Wants entirely. Secondly, explore opportunities to boost your income. This might involve pursuing career advancement for higher-paying roles, or starting a side hustle for additional income.

What is the maximum you should commit to FinKratt? There is generally no fixed upper limit. However, the key is to find a balance between maintaining a quality of life that you find fulfilling and achieving your financial goals. Ultimately, the purpose of your FinKratt is to enhance your life, not to diminish it. So while it’s admirable to be ambitious about saving and investing, it’s also important to ensure that you’re not depriving yourself to the point of discomfort or unhappiness, especially if you’re already well on track with the Financial Levels and your overall financial objectives.

5. Why is the commitment to Debt Zero important?

A key principle of the FinKratt Roadmap is the concept of Debt Zero. This means avoiding any new debts until reaching at least Level 5 of the FinKratt Roadmap. Even at Level 5 and beyond, you should only consider what is categorised as ‘good debt’—debt that has the potential to increase your net worth or generate future income. Examples could potentially include education loans or a residential mortgage, but only if they are part of a strategic plan aimed at effectively augmenting your financial resources. Conversely, ‘bad debt’, such as consumer loans or credit card debt, should always be avoided. This commitment to Debt Zero is not just a recommendation, but a cornerstone of the Roadmap. In fact, the Roadmap is designed to work only for those who are ready to embrace the Debt Zero approach. Without it, the effectiveness of the Roadmap will be compromised.

6. How to succeed?

Succeeding will be entirely up to you, luckily we have some guiding principles that could make this easier for you.

Commitment and dedication. We aren’t going to lie, this will probably seem and be quite hard as you would need to possibly change some of your habits and accommodate new ones. This will take time and there might be few bumps on the road, but the important part is to keep committed to the journey.

Establishing goals. Establishing goals is an important part of your Roadmap. Without goals and steps, the journey might feel intangible and way too long. Setting your own personal goals provides clarity on what you are aiming to achieve. It helps define your direction and focus your efforts on specific outcomes. Remaining committed to these goals will allow you to witness and experience the advancements you are making.

Keeping track of your progress. It’s important to keep track of the progress that you are making. Keeping track of the progress will help you to measure your efficiency, keep up the motivation, make adjustments to your personal strategy and if truly needed, then also adjusting your personal goals.

Celebrating wins! These will act as motivational boosters. Breaking down your personal objectives into smaller, achievable victories makes the overall process more manageable and encourages continued progress. Also, celebrating your wins will help to build confidence. It provides evidence of one’s abilities and competence, reinforcing the belief that success is attainable through effort and skill. Recognising wins during challenging times can help you to build resilience. It serves as a reminder of your ability to overcome obstacles and adapt to change, reinforcing a positive mindset even in the face of difficulties.

Level 1: Safety Net

What is a Safety Net and why is it important?
Having a safety net means you won’t have to resort to credit cards or loans when faced with unexpected costs, thereby avoiding potential debt. This buffer isn’t meant for regular expenses or planned purchases, but as a cushion against life’s unpredictabilities.
In essence, a safety net is your financial parachute, ready to deploy when life takes an unexpected turn. It grants you the freedom to handle emergencies with financial confidence, avoiding the stress and potential pitfalls associated with accumulating debt.

How do you find funds for your Safety Net?
First you should be going over level 0 and conducting a financial reflection or audit. This will help you to see some of the potential saving areas. We will bring out some of the options for how you could be able to generate funds for your safety net.
As said, go over level 0 and understand your Needs, Wants and Finkratt
Consider negotiating bills, exploring cost-effective alternatives, or simply cutting back on non-essential expenses. Small adjustments in multiple areas can lead to significant savings over time.
Review your subscriptions, especially mobile apps and entertainment services like Spotify, Netflix, and YouTube etc. Identify essential ones for your well-being and daily life, and consider cutting back on less crucial ones to avoid accumulating unnecessary expenses.
Examining micro-habits can uncover hidden costs affecting your finances. For example, a daily 2.7 € coffee on every workday accumulates to 56.7 € monthly and 680 € annually. Adding a snack could raise expenses to 84 € monthly and 1008 € yearly. Assessing such habits reveals adjustment opportunities without sacrificing enjoyment.
For groceries, assess both the chosen store and items bought. Prioritize in-season produce and reconsider unnecessary purchases for significant savings. Review lunch habits; daily spending of 6€ totals 126 € monthly and 1512 € yearly. Making your own meals not only saves money but also allows for healthier choices.

These savings might seem small when looking at them individually but combining them together gives substantial boost to your savings.

How do you increase your income?
Exploring opportunities to increase your income is a proactive step toward enhancing your financial well-being. Consider these strategies:

Side Hustle or Part-Time Job: Look for side hustles or part-time jobs that align with your skills and interests. The gig economy offers various opportunities that can complement your main source of income.

More Shifts or Overtime: Check if there’s a possibility to take on additional shifts at your current job or work overtime. This can be a straightforward way to boost your earnings, especially if the option is available in your current role.

Salary Negotiation or promotion: Prepare for a conversation with your supervisor about the possibility of a salary increase or promotion. Clearly articulate your achievements, responsibilities, and any instances where you’ve gone above and beyond expectations. Provide concrete examples of your contributions to the company.

Remember to approach this conversation professionally and be well-prepared. Highlight specific instances where you’ve added value to the organization, taken on extra responsibilities, or achieved notable results. Demonstrating your worth and contributions will strengthen your case for a salary increase.

Increasing your income is a multi-faceted approach that involves both exploring new opportunities and maximizing your current earning potential. Stay proactive, be persistent, and leverage your skills to create additional streams of income.

What are the actionables for Safety Net?
Go over lvl 0. Make sure that you have gone through different options that could accelerate your ability to accumulate savings, this would include increasing your income.

Automate Your Savings: Ensure that your savings are automated by setting up automatic transfers to a separate account as soon as you receive your income. This establishes a consistent and disciplined approach to saving. These savings will be gathered towards your safety net.

Set a Safety Net Timeline: Understand your timeline for achieving your safety net goal. Consider factors like your current savings rate and the targeted amount for your safety net. This timeline serves as a guide and motivator.

Track Your Progress: Regularly monitor and track your savings progress. If needed Uuse tools or apps to visualize how close you are to reaching your safety net goal. This tracking mechanism keeps you accountable and motivated.

Celebrate Milestones: Break down your savings journey into smaller benchmarks and celebrate each achievement. Whether it’s reaching a certain percentage of your goal or saving consistently for a specific period, these milestones deserve recognition.

What does the term “pay yourself first” mean?
The principle of “paying yourself first” is a powerful strategy for building financial stability and securing your future. This statement is still relevant to this day, nearly a century after the book “The richest man in Babylon” by George Samuel Clason was published.

The concept is simple: when you receive your income, allocate a predetermined percentage or amount to your savings or investment accounts before using the remaining funds for your regular expenses. By making saving a non-negotiable priority, you ensure that you are building wealth for your future before any other financial obligations or discretionary spending.

Even covering your needs can be seen as “paying someone else”. You would pay for the electricity company, bank, grocery store etc. All of these are businesses that want to earn a profit. By “paying yourself first” you would be paying a profit to yourself from your monthly income.

Level 2: Debt Demolition

What is Debt Demolition and why is it important?
Debt Demolition is when you start to tackle debt systematically. Embracing Debt Demolition signifies a methodical and dedicated approach to conquering your debts, making it a top priority in your financial journey. Implementing strategic methods like the Avalanche or Snowball techniques not only amplifies the impact of your debt reduction efforts but also ensures a more efficient and structured path towards financial stability.

Recognizing the importance of getting debt free is crucial. Reducing and eliminating debt not only frees up financial resources but also provides peace of mind and empowers you to build a more secure future. As important is to make sure that you don’t fall into debt once you have gotten rid of it, that’s why we have placed the Safety Net prior to Debt Demolition.

How big are debts actually?
Understanding the true size of debts are often mistaken as this is something that the credit institutions don’t really show you in the best and clearest possible way (this includes your bank). They rather advertise the fact that how “good” the interest rates are and what extras their credit card offers.
Here is an example of a credit card debt:

Loan Amount: 5000 EUR
Monthly Payment: 100 EUR
Initially, one might think that repaying 100 EUR per month for a 5000 EUR loan would take around 50 months or 4 years. However, due to the compounding effect of interest, the reality is different, it will take you around 9 years.

Credit cards often carry high-interest rates, typically around 20%. Some credit cards may have rates higher or lower, but 20% is a common estimate.

Total Interest Paid:
With a 20% interest rate, the total interest paid on a 5000 EUR loan over time would be around 5840 EUR.This means the total cost of the loan would be approximately 10,840 EUR.

On the unfortunate event that your credit card interest rate escalates to a daunting 24%, the prospect of successfully managing that debt diminishes significantly. This situation demands prompt action, and seeking financial assistance becomes not just a suggestion but a vital necessity. Don’t let the burden of high interest rates overwhelm your financial stability. In Estonia, the government provides official channels to guide you through these challenges, and you can explore valuable resources at https://minuraha.ee/et.

This example underscores the importance of not only understanding the interest rates on your debts but also the significant impact they can have on the total repayment amount and duration.

When tackling debts, it’s essential to be aware of the terms and conditions, especially interest rates, associated with each loan. This awareness empowers you to make informed decisions and develop effective strategies for debt repayment.

What is the Avalanche method?
The Avalanche method is a debt repayment strategy that focuses on minimizing the overall interest paid on debts. It involves prioritizing debts based on their interest rates and paying off the highest-interest debts first, while making minimum payments on others. The Avalanche method is considered financially efficient because it targets the debts that accrue the most interest, thereby reducing the overall interest paid over time.

Here’s how the Avalanche method typically works:
List Your Debts: Compile a list of all your debts, including credit cards, loans, and other financial obligations. Include the outstanding balance and the respective interest rates for each debt.
Prioritize by Interest Rate: Arrange your debts in descending order based on their interest rates, with the debt carrying the highest interest rate at the top of the list.
Allocate Extra Payments: While making minimum payments on all your debts, allocate any extra funds or additional payments towards the debt with the highest interest rate. This accelerates the repayment of the high-interest debt, saving you money on interest in the long run.
Pick your next debt: Once the highest-interest debt is paid off, take the money that was previously allocated to that debt and apply it to the next debt on the list. This creates a domino effect, allowing you to pay off debts more quickly as you move down the list.

What is the Snowball method?
The Snowball method is a debt repayment strategy that prioritizes paying off the smallest debts first, regardless of the interest rates. It is a psychological approach that aims to provide a sense of accomplishment and motivation by quickly eliminating individual debts. Here’s how the Snowball method typically works:
List Your Debts: Compile a list of all your debts, including credit cards, loans, and other financial obligations. Include the outstanding balance for each debt.
Prioritize by Debt Size: Arrange your debts in ascending order based on their outstanding balances, with the smallest debt at the top of the list.
Allocate Extra Payments: While making minimum payments on all your debts, allocate any extra funds or additional payments towards the smallest debt on the list. Focus on paying off this smallest debt as quickly as possible.
Snowball Effect: Once the smallest debt is paid off, take the money that was previously allocated to that debt and apply it to the next smallest debt on the list. This creates a snowball effect, allowing you to pay off increasingly larger debts as you progress.

The Snowball method is designed to build momentum and motivation as you experience quick wins by eliminating smaller debts. While it may not necessarily save as much money on interest as the Avalanche method (which targets higher-interest debts first), the psychological benefits of successfully clearing debts can be empowering and encourage individuals to stay committed to their debt repayment journey.

What are the actionables for tackling your debts?

Here is a list of actionables you should be taking when you start your Debt Demolition journey.
Assess Your Safety Net: Examine your level 0 and explore potential sources of extra income or savings.
Pause Investments and Pension Contributions: Temporarily halt investment activities and pension contributions to the 3rd pillar. Maintain contributions to the 2nd pillar.
Debt Repayment Method: Choose between the Snowball or Avalanche method based on your financial personality and preferences.
Identify First Debt: Select the initial debt you’ll tackle first.
Minimum Payments: Ensure you make minimum monthly payments on other debts.
Utilize Level 0: Leverage funds from level 0 to power through the chosen debt.
Set Goals and Milestones: Establish achievable goals and milestones to keep yourself motivated throughout the process.
Celebrate Achievements: Celebrate paying off your first debt, recognizing it as a significant milestone.
Select Next Debt: Choose your next debt to focus on.
Combine Freed Funds: Combine funds from the successfully paid-off debt with your available resources.
Repeat Steps 4-10: Continue the process of identifying, paying off, and celebrating until you are debt-free.

Level 3: Living Buffer

What is a living buffer?
Having a “Living Buffer” means equipping yourself with at least 3 months’ worth of living expenses set aside, in case you lose your main source of income. This isn’t just a safety net—it’s a comprehensive cushion designed to protect you from the uncertainties of work life.

Why is having a living buffer important?
Why It’s Important: Having a buffer can be a lifeline, helping you stay afloat without needing to make drastic lifestyle changes in the face of a job loss or similar unexpected emergencies. It brings peace of mind, knowing that you have half a year’s expenses covered, which significantly reduces stress and provides mental tranquility. Beyond just stability, having this financial cushion also affords you flexibility and freedom. In periods of financial disruption, a living buffer gives you the luxury of time—whether that’s time to search for another job, time to recover, or time to re-strategise—without being burdened by immediate financial pressures. Additionally, it empowers you to step away from a job that may be harmful to your well-being, knowing you have a safety net.

Why should the living buffer be at least 3 months?
The choice of a 3-month buffer is grounded in practicality, as it matches the minimum recommended average time for individuals to try to secure new employment in the EU—from initiating the job search to actually starting work. While this timeframe can vary based on the industry, job level, and other factors, having at least 3 months worth of living expenses represents a minimum prudent benchmark. The aim is to ensure you are always ready for such a transition period. It’s important to note that the Living Buffer is intended to cover living expenses, encompassing at least necessities (‘Needs’) and eventually also discretionary spending (‘Wants’), without necessarily extending to any additional financial commitments.

How to store your Living Buffer?
Given the purpose of the Living Buffer—to be accessible in case you lose your main source of income—it’s important that these funds are both safe and relatively easy to withdraw. Unlike the Safety Net in Level 1, which needs to be highly liquid for immediate accessibility, the Living Buffer can be stored in options that offer a bit of resistance against inflation. However, this doesn’t mean compromising on safety or accessibility. Investing in variable income securities (e.g., Stocks) is not advisable due to the inherent risks. Instead, opt for safer alternatives like fixed income securities. For example, a fixed-term deposit ladder with 3-month intervals could be a wise choice, as it ensures regular availability of funds while providing a fixed rate of return.

What are the actionables for establishing a well established Living Buffer?

Separate Accounts for Safety Net: Ensure your Safety Net is maintained in a distinct account from your regular spending account. This separation facilitates easy access for emergencies.

Living Buffer Protection: For your Living Buffer, the funds should be placed in a location sheltered from inflation. This isn’t speculative money for stock or crypto markets; instead, it’s your financial safety cushion.

Low-Risk Financial Instruments: Invest in the lowest-risk financial products through a trusted financial service provider. Choosing the right instruments is crucial; seek professional advice to determine the best options for your Living Buffer.

Automate Savings: Depending on your chosen financial instrument, set up an automated monthly payment system until you reach your goal. Alternatively, consider saving a lump sum, like €1000, on a separate account before transferring it to your investment instrument. This minimizes overhead costs, and one larger payment is often more cost-effective than multiple smaller ones.

Track Progress: Regularly monitor and assess your progress. Acknowledge that the journey may have its highs and lows, but consistency is your strength.

Set Benchmarks: Establish achievable benchmarks and celebrate reaching them. Saving can be challenging, especially when adjusting habits. Recognizing and celebrating small successes provides motivation and reinforces the purpose behind your financial efforts.

Level 4: Golden Age

What is the Golden Age?
As a reality we all must face, aging is inevitable, and the future is uncertain. We cannot predict our financial stability, health status, or the cost of living in our old age. Therefore, we should prioritise setting aside funds specifically for retirement. That is why we have tackled this in our roadmap as well. The Golden Age step is all about securing your financial stability for your later years. The sooner you start with this the more comfortable life you would be able to live.

How much should I contribute to the pension fund?
The Second and Third Pillars are two great additional savings options; but they’re a vital component of a secure retirement strategy. The First Pillar, along with the mandatory minimum contribution of 2% to the Second Pillar (and corresponding State contribution of 4% from the Social Tax paid), may fall short in sustaining your current lifestyle after retirement. This is especially true considering the rising average lifespan and the increasing costs of living, notably in healthcare. Therefore, enhancing your Second Pillar contributions to the full 6% of your gross wage and opening and maximising a Third Pillar account at 15% of your annual gross income are great options. This optimised approach to both pillars not only secures an immediate 20% return via tax deductions but also builds a strong, stable investment portfolio. Such a strategy is decisive in facing life’s unpredictabilities, including employment interruptions, which can impact consistent contributions.. Additionally, maximising your contributions across both pillars not only enhances your pension base for additional security but also fortifies a dependable and profitable financial foundation for your retirement years, ensuring you have ample funds to meet all your needs comfortably.

Why is the III pillar one of the best investment opportunities?
The Third Pillar stands out as a voluntary pension savings system, designed to enhance individuals’ financial stability in retirement through personal contributions, which can be calculated up to a maximum of 15% of one’s gross yearly salary and capped annually at €6,000. Contributions made towards the Third Pillar are tax deductible, which means that under Estonia’s flat income tax rate of 20%, the money invested in the Third Pillar will be deducted from your taxable income. To put it in perspective, imagine you earn a gross salary of €1,600 per month, amounting to €19,200 annually. If you decide to allocate 15% of this annual income to the Third Pillar, your contributions would sum up to €2,880 for the year. As a result of this contribution, you would be entitled to receive a tax refund from the government , calculated as 20% of the invested amount. In this case, the tax refund would amount to €576, which you can thereafter use as you see fit and invest even further. So you could look at this as guaranteed returns from your investment, which makes it one of the best investment opportunities.

In addition to the tax benefits, the Third Pillar also provides the opportunity for potential financial growth through investments in pension funds. This introduces the prospect of returns based on compound interest, potentially increasing the value of the contributions over time. Effectively, one could perceive the immediate 20% tax return as a baseline return on investment provided by the State, irrespective of any additional potential market-based returns from the actual investments.

Which pension fund should I pick?
When selecting a pension fund, there are several factors to consider to ensure that it aligns with your financial goals and preferences. Here are some key considerations:

Risk Tolerance:
Assess your risk tolerance based on your age, financial goals, and investment preferences. Pension funds vary in risk profiles, with some being more conservative and others more aggressive.

Fund Performance:
Review the historical performance of pension funds. Look for funds that have consistently delivered competitive returns over the long term. However, do keep in mind that past performance is not indicative of future results, but it can provide insights into a fund’s management strategy.

Management Fees:
Consider the fees associated with each pension fund. Management fees can vary, and lower fees can have a significant impact on your long-term returns. Compare the fees of different funds and choose one that offers a good balance between performance and costs.

Fund Manager Review:
Research the reputation of the fund management companies/banks offering the pension funds and the fund managers. Look for providers with a strong track record, good financial stability, and a positive reputation for customer service.

Investment Strategy:
Understand the investment strategy of each fund. Some funds may focus on equities, while others may have a more conservative approach with a higher allocation to bonds. Choose a fund whose investment strategy aligns with your financial goals and risk tolerance.

Exit Options:
Consider the flexibility of the pension fund regarding withdrawals and transfers. Check if the fund allows you to switch between funds or if there are penalties for early withdrawals. Also, keep in mind that there are different exit requirements between the 2nd and 3rd pillar. However, exiting and selling your funds should be something that you should avoid.

Regulatory Environment:
Stay informed about any changes in the regulatory environment that may impact pension funds. This includes changes in contribution rates, tax implications, and other relevant regulations. For example, the most recent are the changes regarding the contributions to the second pillar that can be now 2%,4% and 6% from your gross salary, while the state keeps adding the extra 4%.

Communication and Transparency:
Choose a pension fund that provides clear and transparent information about its operations, fees, and performance. Regular communication from the fund management company can help you stay informed about your investments.

You can make yourself familiar with different pension funds, both the 2nd and 3rd pillar from the pensionikeskus.ee website.

Level 5: Growth Plan

What is a Growth Plan?
A Growth Plan entails aiming for the strategic expansion of your wealth in ways that resonate with your personal objectives and values. Although traditional investments usually play a key role in long-term financial prosperity, the scope of financial growth is not just limited to them. It may also include making deliberate plans to launch a business, investing in further education for potential salary raises, and any other options that may reasonably contribute to long-term financial well-being. This way, financial growth requires a balanced approach, combining calculated risk-taking, diversification, and astute decision-making.
Why is a Growth Plan important?
Financial growth is one of the main forces that can drive you away from the paycheck to paycheck cycle. Building a robust financial foundation provides a sense of security in the sense that you will have the resources to navigate most challenges that may arise. Moreover, the freedom that comes with financial growth opens up new opportunities and choices, allowing you to live life on your terms and pursue your passions without monetary constraints. Ultimately, financial prosperity cultivates a sense of independence, empowering you to take control of your financial destiny and shape a future that aligns with your aspirations and values.

What should I consider before I start with my Growth Plan?

Evaluate your knowledge
Embarking on your investing journey requires a solid foundation of knowledge. Begin by assessing your current understanding of investing, including knowledge about various financial instruments, associated risks, tax obligations, and service fees. Evaluate the service providers in your chosen field and gauge your trust in these companies.
If there are gaps in your knowledge, consider attending training sessions, seminars, or taking online courses. Books authored by reputable experts in the field can also be valuable resources. When selecting educational materials, ensure that the authors or presenters are credible and trustworthy.

Craft a Strategy or Goal:
Begin by documenting a clear strategy or goal for your Growth Plan. This document should articulate what you aim to achieve, the underlying reasons, and the actions you will take. It’s equally important to outline what you won’t do. Incorporate motivational elements to keep you driven, but also include safeguards against impulsive decisions driven by the allure of unrealistic returns.

Motivation and Realism:
Ensure your strategy includes motivational aspects that resonate with your aspirations. Simultaneously, introduce a dose of realism to guard against the temptation of deals promising instant wealth. If a proposition seems too good to be true, it likely is. Your strategy should act as a guiding beacon, steering you away from imprudent ventures and potential pitfalls.

Risk Mitigation:
Address the risk factor explicitly in your strategy. Clearly define your risk tolerance and set limits on the level of risk you are comfortable taking. A well-thought-out strategy not only propels you forward but also acts as a restraint, preventing hasty decisions that could jeopardize your financial well-being.

Remember, your Growth Plan is a personal journey, and a thoughtfully articulated strategy serves as a compass, keeping you on course amid the dynamic landscape of financial opportunities.

What to consider when choosing an investment platform/service provider?

Choose the best service provider for you. This is no easy task as there are numerous different providers across the globe. Choosing from them is difficult but we recommend keeping it as easy as possible for yourself.. Also, your strategy/goal document should be able to actually help you choose the right service provider. Here are some points that could help you find the best option for you:

Fees and Costs:
Understand the fee structure, including commissions, management fees, and any other charges. Compare the fees across different providers to ensure you’re getting value for money.

Account Types and Options:
Make sure what kind of specific accounts they offer and what reliabilities these will bring you. Are taxes deducted automatically, does it offer the needed account types you need (joint account, investment account, investing for children). Does it offer automatic investments, do you want/need one?

Investment Options:
Evaluate the range of investment options available, including stocks, bonds, mutual funds, exchange-traded funds (ETFs), and other investment vehicles. Choose a provider that provides a diverse array of investment choices to suit your risk tolerance and investment strategy.

Customer Service:
Consider the quality of customer service and support. Ensure that the provider offers responsive and knowledgeable customer support, especially if you are new to investing or have specific questions about your account.

Technology and Platform:
Evaluate the provider’s online platform and technology. A user-friendly and intuitive interface, along with mobile accessibility, can enhance your overall investing experience.

Reputation and Reliability:
Research the provider’s reputation and reliability. Look for reviews from other users, check for any regulatory actions or complaints, and verify how long the provider has been in business.

Regulatory Compliance:
Ensure that the investing service provider is regulated and compliant with relevant financial authorities. This adds a layer of security and ensures that the provider adheres to industry standards and regulations.

Account Security:
Security is paramount when it comes to your financial accounts. Check the security measures in place, such as encryption, two-factor authentication, and the provider’s track record in protecting client information.

Minimum Investment Requirements:
Some providers may have minimum investment requirements. Make sure these requirements align with your budget and financial goals.

Ease of Withdrawals and Transfers:
Understand the procedures and any associated costs for withdrawing funds or transferring your account to another provider. Flexibility in managing your investments is important.

What is “good debt”?
Good debt refers to borrowing money for purposes that have the potential to generate long-term value or benefits over time. Unlike bad debt, which typically involves borrowing for non-essential, depreciating items, good debt is associated with investments that can contribute positively to your financial well-being. Here are some examples of what could be considered as good debt:

Mortgage Loans:
Borrowing to purchase a home is generally considered good debt because it involves investing in an asset that has the potential to appreciate over time. Additionally, owning a home provides stability and can serve as a form of forced savings. Also, usually mortgage loans have much lower interest rates.

Small Business Loans:
Borrowing money to start or expand a business can be considered good debt if the business has a solid plan and growth potential. A successful business can generate income and improve your overall financial situation. However establishing a business would require quite a bit of effort and you should never invest your personal funds in the amounts that would put your overall financial stability at risk.

Real Estate Investments:
Taking on debt to invest in real estate properties for rental income or capital appreciation can be considered good debt. Real estate has the potential to provide a steady income stream and may appreciate in value over time.

It’s important to note that the perception of good debt can vary depending on individual circumstances, risk tolerance, and financial goals. Additionally, responsible management of debt, including making timely payments and avoiding excessive debt, is crucial to ensuring that it remains “good” and contributes positively to your financial well-being.

What is compound interest?
Compound interest is a concept in finance where interest is not only calculated on the initial principal amount (the original amount of money), but also on the accumulated interest from previous periods. In other words, it’s interest on interest.

While there are multiple avenues for financial growth, the truth is that traditional investments and compound interest have a proven track record of substantial returns. Traditional investments typically involve allocating funds to established asset classes such as bonds and equity shares, all with the goal of achieving capital growth and earning dividends and interest over time. Among these, variable income securities like the S&P 500 ETF stand out for their potential to yield significant dividends, although with higher associated risks. In fact, the S&P 500 has historically delivered an average annual return of around 10% before inflation. The magic of compound interest transforms this growth from a linear progression to an exponential one, enabling your returns to generate additional returns over time. To illustrate, a consistent monthly investment of €100 in an S&P 500 ETF over 30 years, with all dividends reinvested, could grow your wealth to over €220,000. To put this in perspective, your total personal contribution would amount to just €36,000 over the 30-year period. This stark contrast shows the profound impact of compound interest and thus the need to consider it in your Growth Plan.

Level 6: Nest Egg

What is the Nesting Egg step?
The objective of this step is to build a financial foundation for your children (or grandchildren).By setting aside funds from an early age, you are taking a proactive step to set your children up for financial success in adulthood.

Why is it important?
Establishing a financial reserve for your children shows your commitment to their future well-being. The funds accumulated can open doors for them in the future, eventually providing them with the flexibility to make life choices that align with their passions and values, rather than being solely driven by financial constraints.

Where to store the funds?
The strategy for storing your Nest Egg funds largely depends on your child’s age and the time horizon for when the funds will be needed. If you begin setting aside money when your child is very young, then investing in variable income securities such as an S&P 500 ETF can be a great choice. For example, let’s say you decide to invest €20 monthly in such ETF from the moment your child is born. Assuming an average annual return of 10%, by the time your child turns 18, the total investment would have grown to approximately €12,400, despite you only contributing a total of €4,320 over those 18 years.
Ultimately the choice is yours; there are multiple banks and financial institutions in Estonia that offer different products aimed at saving for the future of one’s children.

What steps should you take before starting?
Saving money for your children offers various possibilities, and the choice can vary by country. One straightforward option is investing in low-risk monetary funds like ETFs. The specific fund selection should align with your investment strategy, emphasizing lower risk for the initial substantial amount your children receive.

Several factors influence this decision, including when you start investing—right after birth or later—and when you plan to give the funds to your children, whether at eighteen or after university or even later.

Before you embark on this financial journey, consider the following action steps:

Educate Yourself:
Read articles, blogs, and books covering topics such as taxes, inheritance, buying and selling, and managing investments for children. Gain a comprehensive understanding of the landscape.

Choose an Instrument:
Decide on a financial instrument, considering options like bonds, single stocks, or ETFs. Given the long-term horizon, opting for a lower-risk instrument is prudent.

Select a Service Provider:
Choose a service provider that aligns with your needs, considering factors such as cost, security, product availability, customer support, and overall trustworthiness.

Set Up Automatic Transfers:
Establish an automatic transfer from your monthly income to the chosen investment account. Consistent contributions facilitate steady growth.

Monitor Investments and Service Provider:
Keep a close eye on your investments and regularly assess the performance of your chosen service provider. Ensure it continues to meet your criteria for cost, security, and overall satisfaction.

By following these steps, you can proactively plan for your children’s financial future and provide them with a solid foundation for their own financial journey.

Level 7: Legacy Shield

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