Getting the Financial Foundations Right for Expats in Europe

Our driving goal is to help people to achieve financial wellbeing. This can mean different things for different people and is why our philosophy is centred around objectives-based advice. This means we focus on what it is that is most important to you, and work on how you can achieve those goals.

One of the important aspects of our relationships with our clients is education- financial literacy. We have written regularly about the importance of avoiding jargon, but it goes further than that. We want our clients to understand the rationale behind the decisions and to becoming financially literate so they can apply this knowledge to other aspects of their lives.

We often describe the process in the form of a pyramid, with stability at the bottom, on which is built opportunity, which when in place, we can look at advantage.  In this article, we focus on the foundations that we believe are the pre-requisites for financial wellbeing. We will leave the topics of opportunity and advantage for future articles.

Stability is the vital foundation. The actions you take at the subsequent levels may be more exciting, but they are reliant on the base step and the items you put in place.

When we look at stability we consider key actions and foundational financial literacy. This can help you to make good decisions on your own.

What is included in the foundation stability tier?

The overriding objective to come out of the establishment of this tier is resilience through prudent financial management.

There are 4 key actions and three principles to understand.

The 4 key actions are:

Cash flow

The path to your financial objectives, for working professionals, is heavily influenced by cash flow. One of the traps many people fall into is expense creep. This is when your cost of living expands, and discretionary expenses increase in line with, and sometimes faster than, your growth in earnings. Changes that occur at different points in life can make some expense increase inevitable, for example, child care costs. Others though, can be a result of habit, or automatic spending. Having structure and discipline around cash flow is a first step in applying your finances to achieve your life goals, and small changes, regularly applied, can have profound impacts over time.

Emergency funds

When you have assessed your cash flow, and you know how much it costs you to live, you should then focus on ensuring you have emergency funds in place to cover this cost, should you find your self without income for a period of time. The amount you need will vary depending on your specific circumstances, and you may need to build this buffer up over time. An emergency fund can provide peace of mind and allow you to look to the next step.

Goal clarity

This is the big picture, what is it that is most important to you, what you aspire towards, and the goals you want to achieve. Reminding ourselves that money is a means to an end, your goals are the reason you invest, and shape how you should manage your money, and indeed your life. This is a critical step, and one we spend time on with our clients. Take the time to consider carefully what is most important to you.

Risk coverage

At this point in the stability building, we have assessed cash flow, put emergency funds, or a plan for them in place, and have articulated what it is we are trying to achieve. This next piece considers what if it all goes wrong. What contingencies do you need to protect against, and how will you do that? This may be house insurance, it could be life insurance, or a self funded protection, like the emergency fund pool.

The 3 principles that we consider important to understand at this point are:

• Savings versus investment

Understanding the difference these concepts means they can be better deployed to your life circumstances. In general terms, savings re what you accrue in a bank account, with expectations of high security, but low returns. An investment tends to be longer term, and sometimes with a variability in returns- a point that brings us to our next point.

• Risk and return

we like our clients to understand this investment reality, that there is a direct relationship between risk and return. Simply, the higher the short term risk in an investment, meaning the risk that investment value may be less tomorrow than it is today, the higher the likely return over the longer term. Considering this in relation to the above point and example, a savings account at an EU regulated bank is not expected to have swings in value. It is expected to be worth about the same tomorrow as it is today, and a small, predictable rate of return.  An investment in a portfolio of growth assets, like stocks and property, might have a reduced value tomorrow, and the values can vary more widely form day to day, but it also has the potential to grow in value over the longer term at a greater rate then the lower risk bank account. This leads us to the third principle.

• Time

The third principle is that risk of a negative return in an investment, reduces over time. The risk of an investment reducing in value from one day to the next is relatively high, whereas risk of a loss in value over a longer time period, such as ten years, is markedly lower.

With a firm grasp of these core financial principles, a financial plan that commences with the 4 initial actions can be implemented. If you base these around your goals, and then build to the second and third tiers of opportunity and advantage , a clear path to achieving your goals can be put in place.

Speak with us to see how we can help you to put a financial plan in place that is just right for your situation. Contact us at info@extinvestments.com.