What is economic well-being? How many of us can reach it? And above all, how?
In this article, we will learn to better manage expenses, to protect ourselves against catastrophic problems and finally to invest what we have put aside.
Through practical examples, detailed explanations and useful advice, we will know the three fundamental steps to create the much-dreamed economic well-being.
Things we need to know and do to become wealthy
Whatever you define our word, wealthy takes time. Becoming wealthy can be a goal.
If we pursue it deliberately and carefully, we will learn some good habits that, applied constantly, will help us not only to accumulate well-being, but not to squander it when we think we are “safe”.
Everything you need to know
To face such an objective it is necessary to adopt the right mentality, which is based on some concepts that we must always keep in mind:
- The world is full of distractions – each of us has its weaknesses and temptations. The trick is to be aware of it, and be ready to face them.
- Well-being belongs to those who are attentive – nothing valid happens without planning and commitment. Building wellness is simple, but it is not easy.
- Nobody cares about you more than yourself – it’s up to you. You are solely responsible for your future well-being. This is good news, because no one else would take as much care of it as you do.
All you need to do
It’s time to take control of your economic future.
Here are some steps to get started:
- Visualize your future – take a sheet and write down what well-being means to you. Imagine a future where you will have achieved this goal, and describe it.
- You are determined to win – it all starts with your decision. If you really want your future to be as you described it in the previous step, make the decision and take it all the way.
The 3 steps to economic success
There are three basic steps that each of us must take to achieve economic success. They will be slightly different for each of us, but the basic structure remains unchanged. If you take these steps and keep repeating them, you will reach your goal. It won’t be easy, it will require a lot of work, but the mechanics are simple.
- Spend less than you earn. This is undoubtedly the fundamental thing to learn to do. There are two ways to do it: you can spend less, or you can earn more. The best way is to do both.
- Insure yourself against disasters. As much as this article can help you take control of your finances, there are things in life that you cannot control. Fortunately, there are ways to mitigate the effects of catastrophic events such as illness and death, such as insurance and emergency funds.
- Invest wisely. Learning to manage expenses and eliminate debts are fairly simple things, but when it comes to putting money aside for the future, we are inundated with a myriad of possibilities, and this often leads us to do nothing.
Spend less than you earn
Spending less than you earn is the first of our three steps, and it is the foundation for everything that will follow. If you can follow this step, everything else will come by itself.
It’s about developing good habits. The nice thing about habits is that they quickly become part of our natural instincts. There are two things you can do to achieve this: spend less, or earn more. The ideal is to do both.
Having a budget does not mean tracking your expenses, it is a matter of deciding in advance how the revenue will be used. Learning to manage your money in this way means learning to know yourself, and avoiding those behaviors that lead us to unnecessary expenses.
An effective way to control expenses is to have two bank accounts: one dedicated only to expenses, in which to keep only the money necessary to pay bills, mortgages and recurring expenses. The second account instead will be the one where we will keep the money for the daily expenses.
Each week, compare the actual releases with those scheduled in the budget. So you can check how much you are spending more (or less), and adjust non-recurring expenses.
Debts are a problem that we all have to face sooner or later. The only way to get rid of a debt is to pay it off. Start by making payments due for each type of debt, and try to pay off minor debts first. By doing so, you will soon come to extinguish the bigger ones, and finally free yourself from this uncomfortable situation.
Try to organize your bill, mortgage and debt payments the day after your payday, if you have a salary that enters the same day every month. By doing this, you will avoid unnecessary spending driven by the fact that the bank account looks richer.
In life, path accidents happen: fines, breakdowns of household appliances, unexpected expenses. Being aware of it and accepting it is the first step in dealing with these problems when they arise.
When something happens that puts you in trouble, the first rule is not to panic. Plan ahead how you can handle such a situation, so that when it shows up, you already know what to do. Avoid situations that put you at risk.
For example, if you know that you tend to buy useless things when you can’t sleep late at night, turn off your PC and phone and read a book. Learn from your mistakes, and try to make sure that you won’t make them again in the future.
Against which situations it is better to insure yourself and which characteristics a good insurance plan must have
Our financial situation is like a home. If the foundation is solid, it will survive even in the event of a disaster. Insurance is one tool for this.
The problem with insurance is that many perceive it as wasted money. But the whole insurance system is based on the principle that the payments of many go to cover the disasters encountered by few.
The three most common catastrophic situations against which it is good to insure are:
- Premature death.
- Diagnosis of a critical illness.
- Inability to work caused by illness or accident.
None of these is a pleasant situation to think about, but we have to estimate the damage they would cause if they arose. This goes from knowing what would happen to our debts (would they pass to any partners or heirs?), To who should manage our recurring expenses, to what would happen to our savings.
Life insurance guarantees us that, should we die (terms and conditions vary according to the policies), a certain sum would be paid to the beneficiary. It is good to understand what each policy offers, in terms of protection, payments, etc. Determine what type of coverage suits your situation – a single person will have different needs than a person with family and children.
Then there are the insurance to protect the income. These serve to protect us should we lose the ability (due to illness, accident or other) to obtain an income. Depending on the type of profession carried out, the position (employee or self-employed, for example), we will be able to take advantage of different policies, which offer different levels of coverage.
Before signing up for any insurance plan, there are a few tips to follow.
- Get several quotes, and compare them. Put the various brokers in competition with each other. They will try to catch your signature, and you have only to gain.
- Keep a written summary of up to one page, which includes each policy, and what it covers.
- Review your coverage schedule regularly. If your situation changes, you may need to make some changes.
The last element to consider in the context of disasters are the wills. Nobody wants to think about their own death, but determining what will happen when we are no longer there can help those we leave not to face further sorrows.
No matter how young and fit you feel, the time to make a will is always now. Contact a professional who can guide you on this path. It may seem like money spent unnecessarily, but it is not.
Decide whether to save or invest and the possible investment risks
Once you have successfully managed to make a budget, you have managed to put aside emergency funds and have taken out insurance against accidents and catastrophic events, the fun moment comes: invest.
A misconception that many people have is that having lots of money in the bank is an effective savings technique. The money left in the bank, however, does not generate well-being: they are simply there. The only benefit they can give us is seeing a large number on the bank statement.
There are many options for investing, and they vary from country to country and from market to market. However, there are some considerations that we can make that apply to any type of investment.
First of all, it is good to understand the difference between savings and investment, or time. When we think in the short term, from three to five years, like Christmas expenses, a holiday, etc.
For the long term, such as buying a house, marriage of children, or most importantly: your retirement.
Whether you choose to save or invest, the important thing is always to have a goal in mind. The technique of “saving as much as possible” is not efficient, because we don’t have a goal to aim for. A goal must be measurable and must have a deadline.
Investment is an activity that carries with it a risk component. This is a word that often frightens us, but we need to understand its meaning.
If we decide to save, our capital generates interest, usually low. By investing, we are committing capital for a longer period, and upon expiration of the investment we will have an income. One thing that must always be kept in mind is that the capital invested will fluctuate.
Many novice investors get scared as soon as they see the value of the investment go down, and withdraw it. At that moment the loss is realized. The investment, in fact, generates income or loss only at the moment of maturity (or early withdrawal).
The rules to follow in order not to lose the goal of being well-off
Starting to build your own well-being is a very exciting thing, but in the long run we risk losing sight of the goal. Here are some tips not to miss the route:
- Self-increases – increases, even slightly, the money you put aside every month. The impact that such a small increase will have on the end result is immense.
- Regular reviews – set a time of year to review your budget based on your new situation. If there have been major changes, reviewing your plans means you won’t have to worry about it constantly.
- Engage your partner – a great time to do this is the annual review.
- Be aware of your behavioral bias – knowing your limitations and weaknesses makes you stronger, and less inclined to make mistakes.
When to contact a financial advisor
Time to reach our goal!
Remember the three basic steps we talked about. Following these long-term steps can ensure that you reach your goal.
Remember that you don’t have to do everything right away, but that the right time to start is now.