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TUESDAY, APRIL 13, 2021 | Roman

Private financial planning in 3 Steps

Private financial planning in 3 Steps

Private financial planning, step 1:

Safeguarding against financial ruin

Let’s start with the most urgent step in private financial planning, protecting against financial ruin. When is this danger imminent? Exactly: when income disappears or expenses explode. These risks can be - financially speaking - existentially threatening. And you can largely protect yourself against both.

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When income disappears, the reason is usually that the previous main or sole earner can no longer work - whether due to illness, an accident or, even worse, death. These strokes of fate are bad enough. To avoid financial ruin, there are ways to protect yourself: For example, with term life insurance, occupational disability insurance or daily sickness benefits insurance (for the self-employed).

  1. Cover for incapacity to work: Employers and health insurers pay
  2. Protection in the event of occupational disability: Statutory coverage is minimal
  3. Protection in the event of death: term life insurance as a suitable form of insurance

Exploding expenses are usually caused by high treatment costs for accidents and illnesses or by horrendous claims for damages. Expensive treatment costs are covered by health insurance; in the meantime, general insurance is mandatory for the entire population. This is not the case with personal liability insurance. Contrary to what its name might suggest, this insurance - unlike motor vehicle liability insurance - is not compulsory. In the event of a claim, it can pay out millions of dollars in ruinous damages for a small monthly premium. In addition, exorbitantly high expenses can arise if, after fire, theft or the like. Replacement for the property or the equipment must be procured. Insurance is always advisable if these replacements could not be financed from one’s own resources, but would mean financial ruin. Roughly speaking - residential building insurance (for property owners): yes. Luggage insurance: no.

Done. Once the most important insurance against financial ruin has been taken out (in most cases this means first of all: disability insurance, term life insurance, liability insurance), financial planning goes into the next round, see next subchapter.

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Private financial planning, step 2:

Reduce debts

But just a moment, please, before you think about retirement planning and investing. There is a more important question to answer for private financial planning: Do you have debts? Is your checking account overdrawn, do you still owe money to a supplier, do you have to pay off an installment loan or your apartment/house? If you answer “yes” to even one of these questions, the first thing to do is reduce debt. Why? There are few things more lucrative. Just think about how much interest you have to pay on your debts: for an installment loan it is often 4 to 8 percent, for an overdraft loan or overdraft interest even 10 to 18 percent. If you pay off these debts, you will save a lot of money - without any risk and tax-free. Try to find an absolutely risk-free investment that offers you a guaranteed interest rate of this amount - and that after taxes have been deducted. You will see: there is no such thing. So, by paying off debt, you can save much more money than you could earn with that one investment. So: first pay off debts, then invest money.

Private financial planning, step 3:

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Build reserves

The risks are covered, the debts paid off - is it time to start planning for retirement? Not quite yet. After all, retirement planning often means long-term investment, i.e. no short-term access to money (or high losses if you still want to get your money early). But what happens when the washing machine breaks down, the car needs to be repaired or a move has to be paid for?

Unplanned, high expenses cannot be avoided and can rarely be financed from current income. Going into debt and paying high interest on a loan would not be a good idea either. Especially if savings are available at the same time, but are in long-term financial investments with moderate interest rates.

Before it goes to the age precaution, stands with the private financial planning first of all the topic ?emergency reserve ?on the agenda. Consumer advocates recommend building up a reserve of about three months’ salary that can be accessed at short notice at any time. Then unplanned expenses can be paid without getting into financial trouble. So when you invest the money for the emergency reserve, two criteria apply: The money must be absolutely safe and available at any time.

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When setting aside money for major expenses or purchases, the same applies as for the emergency reserve: security takes precedence over return - at least if the planned expenses or purchases are very important to you. A risky or even speculative investment is then also ruled out. Unlike the emergency reserve, however, the money does not have to be available at all times. As a rule, larger expenses that can be planned (e.g. new car, new kitchen equipment, children’s education, equity for real estate or practice takeover…) will only be incurred in a few years. However, if it is clear when you will need the money at the earliest, it can be firmly invested until then. This brings interest advantages compared to accessing the money at any time. In short: The investment must be secure, but only available in the medium term.

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