The memory of having spent all the money in my account and still having a week to go until my next salary is painfully vivid to me, even though it has been quite a few years since that was my month-to-month reality.
In the hidden depth of my mind, I knew even then that something was structurally wrong with my approach to money, but the official narrative I would give myself was that I wasn’t making enough to support my needs.
I felt I was a victim of my unfair circumstances and, at that time, I was not even aware of inflation and the fact that, indeed, we are enjoying our money less and less every year, because the national economy adjusts its inflation rate mostly to the disadvantage of the final (passive) consumer, like me. A person whose salary does not increase on a year-to-year basis with a percentage that is at least equal to the inflation rate is losing money each year, as goods become ever more expensive, and consumer power decreases.
Personal wealth management? I thought this was something reserved only for the wealthy and I couldn’t see my monthly income as wealth. I started to feel that I was paying exorbitant rent for an apartment which was definitely too big for my actual needs. And I would occasionally go on a guilt trip over the daily taxi rides to my work, but I would rationalize them by saying that the tens of minutes of extra sleep I would gain in the morning were far more important than the money I paid for the fare.
Accumulating? The only possible option of doing that, I thought, was going down to a level of frugality that would be incompatible with my mental wellbeing. So, I shut down the very idea of it. I do realize, in retrospect, that those were only excuses. I would have been able to get enough sleep without paying a disproportionate amount of money on transportation—I would only have needed to get to bed a little earlier.
In truth, money discipline was not a strong point of mine, but things started to change along with my circumstances: I had gotten married, and begun working from home, on a freelance contract. My income had increased, while my expenses halved. My need for transportation decreased, and take-out food was beginning to equate to failure to take care of my family, so it started to fade from the menu.
My husband had plans for our finances, so he had the initiative of creating a family budget. In it, he included recurrent expenses like utilities, food, car expenses and cleaning products in order to evaluate our greatest expenses. But he also included commuting expenses, clothing expenses, vacation expenses, occasional gifts for our family and friends, in order to map out less frequent expenses. We realized we had a comfortable potential to save money, so we started doing just that. My husband opened a bank deposit. This was our first step towards more responsible money management.
It would be only years later that I would find out that our little plan was simply not going to cover our not-even-very-ambitious plan of buying a new car. A bank deposit with a simple interest was not even covering the inflation rate, and our investment was at risk of become less and less advantageous as the interest rate got lower. We were losing money while thinking we are being responsible with our finances. Realizing this showed us the need to draft a financial plan. Luckily, the Managerial Economics class I had just started promised to teach us precisely that: how to manage our wealth wisely and responsibly, and with discipline.
I learned that besides our evaluation of our personal wealth, and the possibility we had to optimize our budget, there was still so much that we could be doing! The first thing was to set a savings goal. I learned that powerful statement attributed to Warren Buffett: “…if you are not earning money in your sleep, you are losing money.” This new philosophy meant that, in order to maximize the impact of the amount we would be saving, we needed to treat that amount of money like our employee: it needed to work for us, instead of us working for it. How were we to achieve that? By making wise investments.
It wouldn’t be long until we learned that the rule of thumb in smart investing was not to put all your eggs in one basket, that is, diversify your investments in order for them to be able to absorb any market shock without being seriously impacted. But what were the precise options we had at hand?
We were already feeding a bank deposit. That was one. But as I already mentioned, the simple interest of that deposit was not enough to cover even the inflation rate. I would soon learn that, unlike simple interest, compound interest has an accumulation function serving as continuous compounding. I did not know then that compound interest is standard in finance and economics. It is the result of reinvesting interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest. Because the interest-on-interest effect can generate increasingly positive returns based on the initial principal amount, it has sometimes been referred to as the “miracle of compound interest.”
Discovering the concept of compound interest opened up my horizon to the realization that I too could become a millionaire, only by a 5 lei daily investment. There was, of course, more to wise investments than the bank deposit option.
Another option was a real estate investment. Our wealth status meant we could not afford to buy a property by paying its price in full. Contracting a mortgage for a house was also too expensive. The monthly amount needed to support such an investment would have obliged us to put all of our investment eggs in the real estate basket. Therefore, we looked at other possibilities too.
Investing in precious metals was another avenue of investment. I would learn that investing in physical gold, for example, was quite controversial among investors. Some argued that gold is a barbaric relic that no longer holds the monetary qualities of the past, while others said gold still is an asset with various intrinsic qualities that make it unique and necessary for investors to hold in their portfolios. More than the philosophical arguments, what convinced us that investing in gold was not an option for us were practical inconveniences: (1) investing in gold requires a big initial cash investment (otherwise you could only buy an insignificant quantity), and (2) even if we were able to invest a larger amount in the beginning, there would be custody taxes that needed to be paid (as we were not going to deposit gold at home, due to obvious safety considerations) and those taxes diminished our return on investment drastically. So gold was off the list too.
Next stop was a life insurance. I began conversing with an insurance broker who gave me several simulations on the evolution of the money I could invest and the outcome of my investments. After carefully considering the offer, I kindly declined it: it was based on medium risk company investments that I could make independently. Funds would be directed towards recurrent non-negotiable commissions for the insurance company—regardless of how well the stocks were being traded on my behalf.
I then heard the government would be issuing treasury bonds. I knew from the class that these were considered the safest type of investments, as the state always delivers the announced interest on its bonds. The low risk of this potential investment was unfortunately not attractive enough to compensate for the rather low interest that was being offered: between 2.95% and 3.75% (1y vs 5y). The interest was higher than the one offered by the bank deposit, but it was still lower than the expected inflation rate.
Then there was the huge universe of the stock market. Intimidating at first, with all its jargon and multiple possibilities, the stock market began to look more friendly after I discovered one of its core mechanisms: long-term investments. Informative article after informative article showed that stock market investments were a winning game long term, not only because of the ”magic” of compound interest, but also because long-term investments have the advantage of being virtually immune to market crises.
Markets rise and fall in a cyclical dance which can be scary to the faint hearted, or to those with young investments, but experienced investors know that a market crisis is an opportunity to be seized by buying promising stocks at a price that is lower than usual. Then, if the investment is kept for long enough, without giving in to panic-selling, it will assimilate the market shock and began to recoup its fall.
I would learn that the Bucharest Stock Market (BVB) is rather young, but that its potential was greater than that of any other Western stock market. The other stock markets were less accessible anyway, due to bank policies of only allowing Foreign Exchange access to clients affording initial investments in the order of thousands Euros.
Having learned of the BET Index, I began to become interested in gathering more information on the possibility of investing in it. BET was the first index developed by BVB. It is the reference index for the capital markets. BET follows the evolution of the 15 most liquid companies listed on the BVB-regulated market, excluding financial investment companies (SIFs). It is an index weighted by free float capitalization. The maximum weight of the symbol is 20%.
In all honesty, mutual funds and ETFs are types of investments that I still need to study about. I am aware that Mutual funds and exchange-traded funds (ETFs) have a lot in common. Both types of funds consist of a mix of many different assets, and represent a common way for investors to diversify. Mutual funds are usually actively managed to buy or sell assets within the fund, in an attempt to beat the market and help investors profit. ETFs are mostly passively managed, as they typically track a specific market index; they can be bought and sold like stocks. Yet another principle I have learned during the class is that one should only invest in what one understands. Therefore, I still need to educate myself regarding mutual funds and ETFs.
I especially left private pensions in last place, since they were actually the field of investment I understood most easily and found to be most accessible. I already had a privately-administered retirement fund, as state law made it compulsory for the administrators of these funds to divide their services between government and private administrations. But by analysing offers for the third pillar of retirement funds, I learned that they are usually as promising as stock investments, and that their long-term evolution is similarly positively estimated.
This has been my family road to financial independence until now. In a year, I grew from knowing absolutely nothing about savings and investments, to being able to write a 5-page essay on how to make up a balanced personal investments portfolio. I was not yet making all the best decisions, but I was growing a base for doing so very soon.
Self-education in the financial field is vital to ensure that we are responsible in managing our income. “Money can work for us,” as the saying goes, only if it has enough time to do so. Therefore, probably the last recommendation is also the crucial one: even if at first it may seem overwhelming, we need to start from somewhere and start quickly.
Alina Kartman is a senior editor at Signs of the Times Romania and ST Network.