The Central and Eastern European person has a lot to take care of when it comes to his/her finances. The reality remains that life will grow more difficult as we age. Facing decreasing fertility rates, the state pension system will struggle to provide individuals with a good lifestyle when retirement or old age come around.
That’s why it is your obligation to take care of yourself.
We will consider Poland as a good example for Central and Eastern Europe (CEE). According to Credit Suisse Wealth X 2018 Report, each Polish adult citizen has, on average a wealth of 31,794 USD. So that is what we may consider an average wealth for CEE individuals. Keep in mind that this includes financial wealth (such as cash, bank deposits, shares, bonds etc.) but also non-financial wealth (mainly real estate).
This average is skewed higher by wealthy individuals who own millions and naturally distort the average. If we take the mean wealth per adult (which means that if the population is 30 million and we sort everyone based on wealth we take exactly the 15th million adult) the amount is 10,572 USD. Pretty sobering numbers I would say.
This amount of wealth is not sufficient by any means to ensure a decent retiring. Even if we take a very modest 1,000 EUR per person to retire the average wealth will ensure the average person will have enough money for 2 years and a bit. What’s even worse, the mean wealth is only enough for several months of retirement (not even one year) at 1,000 EUR per month. If you consider costs will increase (and people will live longer – which implies healthcare costs will grow exponentially), it means that the average person is not prepared at all for a good financial future.
But you are here because you much better than the average. So what does it mean for the above the average CEE person, to have a secure financial future?
Pension (private pension)
The above average individual knows that his pension is important. If he has private pension available to him, he will invest diligently as much as he can to ensure his future. Of course a person working a front-desk in a bank cannot invest as much as the CEO of a multinational company. So, you will see the above average saving broken down into three categories (low end, medium end and high end). You will want to be aim to be as high as you income will allow it.
Since pension funds are typically conservative, we will consider an average return of about 4% per year (4 % increase to the invested amounts each year). When you consider that the typical rate of inflation is about 2.5% per year, 4% is not high, but still it allows you to take advantage of the power of compounding returns (we will discuss the astounding power of compounding in a different post).
So there you have it folks:
By simply investing 1,000 EUR per year (83 EUR per month only), at the end of working age one gets a cool 83,800 EUR. If you up that to 5,000 EUR per year, you would be sitting pretty at 419,000 EUR. Not bad, but I say we can do much better.
So let’s move further to…
Personal Savings and Investments (After Tax)
This is where your responsibility gets bigger. It means that this are your hard earned money that you have in hand. So instead of blowing this on a nice BMW you will decide to invest this for your future.
Because you have the flexibility to be more aggressive with your investments, you will likely earn a higher rate of return. If you have a strong focus on stocks, and average return of 8% per year is realistic.
Here you may want to employ a good financial advisor to work with or at minimum certain online tools to help you make good decisions and sound planning.
So let’s see where we stand here. We have used the same amounts as for pensions on the low end, but increased as we get more ambitious (1,000 EUR per year at the low end, 3,000 EUR at medium end, and 10,000 EUR at high end).
Here are the numbers:
Already we are getting somewhere. So, if I take 10,000 EUR every year and invest it, I would become an EURO multi-millionaire. Nice! Keeping in mind that an average car, if bought from brand new costs about 10,000 EUR per year if you include depreciation, fuel, maintenance, insurance, finance etc. So why not ditch that brand new car you buy every 5 years and that’s the easiest, painless way to become a multi-millionaire. The hard cold numbers show you: this is possible.
Wonderful, we are getting somewhere right now. But wait, the above average individual does not neglect non-financial assets, such as real-estate.
Investing in tangible assets (real estate)
Central and Eastern Europe has a long history with people wanting to own their own house, possibly buying a second or third property to provide rent.
Typically, real estate does not offer as much return as investing in financial instruments, such as stocks (more here).
But let’s see what the numbers say. We have used the same amounts as for after tax financial investments, to make it more simple (1,000 EUR per year at the low end, 3,000 EUR at medium end, and 10,000 EUR at high end).
Note how 8% return versus 3% return per year means the difference between having 2.5 million vs having 1.5 million at the age of 65 if you invest 10,000 EUR per year! Quite a difference.
So there you have it folks! Three ways to look at building wealth. But they are not excluding each other, in fact they complement each other. So, let’s look at the big picture.
Big picture
Growing wealth works better if you stay invested in multiple classes of assets. The smart European knows that building multiple streams of income is the key to achieving financial independence.
Here are the cold numbers. This will put together private pension with after tax investing and having a bit of real estate investing as well:
As you can see, even somebody putting only 1,000 EUR per year (83 EUR per month) in each stream can achieve, very conservatively, 282KEUR when retiring. Someone who can spear 10,000 EUR per year (833 EUR per month) in each asset class can get to 4.4 Million EUR! $4.4 Million EUR for our region is rich, is what most people would say. 282 Thousands EUR, 1.35 Million EUR or 4.4 Million EUR sounds a hell of a lot better than 31 Thousand or 10 Thousand. It is possible.
Recommendations for building wealth:
- Stay disciplined. Use a mentor, if you need to somebody to keep you in check.
- Use financial investing tools (online) and/or work with an advisor.
- Do not blow your resources on depreciating goods (expensive cars are the perfect example)
- Use the power of the X-Factor: compounding interest!
Note:
This is an article inspired by my fellow Financial Independence writer, Financial Samurai.
