I made my first money at the age of 16. Initially distributing brochures where I usually paid 3€ /hour.
The feeling of being independent at the age of 16 and being able to spend your money without the need for help from your parents was unprecedented and impressive.
Obviously at 16, however, I had no experience managing my money, so I usually wasted it on various stupid things.
At the same time, however, I was saving some of them.
What was the game?
Most of people, including me, grew up in a society where people with their money did just 3 things.
- They were paying for their monthly obligations
- They were paying for their consumption (entertainment, clothes, travel, etc.) and
- IF they had money left (usually not) they would save some
And in this order.
But the game changed
There are 2 basic and serious faults in this strategy.
1st when someone follows this order at the end of the month usually has no money left to save.
This is because modern societies are determined by consumerism, and particular by OVERconsumption.
There is an abundance of goods and services and the bombardment we receive daily from media to consume is so great that it is difficult to avoid the trap of consumerism in one way or another.
So if we assume that these 3 steps determine a person’s financial life, what should be the right order?
- Payment of Obligations
- Save and if you have money left
Obviously it is important to pay your monthly fixed obligations. If you do not have a financial problem you cannot ignore these obligations for the simple reason that you create debts to yourself.
The point is, if you are following this triptych, you must first save and then consume whatever is left over.
In a future article we will talk about how to make a budget and manage better your money.
The second mistake is to saving itself. Why?
It used to be a good strategy. Not only was it not wrong but it worked very effectively.
Once upon a time you could make a lot of money just by parking the money in a bank.
The bank generously rewarded your bank deposits with interest rates.
Let’s see what exactly was happening in Greece:
As you can see from the chart, someone with bank deposits in 1991 had returns of 20% per annum.
The peak of the interest rates of the banking system in Greece according to the data of the Bank of Greece came in March 1991 with 20.74% while in the 60’s and 70’s it was only at 5%to 6%.
This phenomenon prevailed in most European and not only countries of the world at that time.
So it made sense for people to want to save their money. 20% yield per year is a dream for your money today.
For example if you saved 50,000€ and at the end of the year it became 60,000€ without doing anything at all. It’s not a small thing.
A little later, however, the interest rate game changed and we will see how.
What hasn’t changed, however, is the mentality of that generation that raised its children with exactly the same WRONG mentality.
This is the situation today in Greece:
As you can see just 2 months ago, in March of 2020, interest rates on deposits in Greece hit a new record low with just 0.29%.
Wow. 0.29% … Less than 20 years later, following the above example now, your 50,000€ will become 50,145€
And you know what the issue is? That they will fall even more in the near future.
Yields will soon be negative. It happens already in many countries around the world already like in Germany where I live now.
Having money in the bank will no longer yield you even these small percentages, because you will lose money every month.
If we add the phenomenon of inflation, then every year your money loses even more purchasing power.
What you have to do
You need to change the order in which you manage your money and add 1 more step. Specifically
- Payment of Obligations
It makes no sense to save money when this system is not working.
Of course you should have an emergency fund as a protection net for things you can’t predict. But it should not be an end goal itself.
Instead, you need to focus on finding ways to increase your wealth step by step.
There are no magic pills to this process, so the first thing you need to do is start reading and then doing.
There are also no guaranteed results. You will make mistakes, they are part of the whole process and experience.
However, if you do not want your finances to be affected during your whole life by the choices of third parties and organizations, then you must act.
And you have to do it today. It’s never too late, and your age doesn’t matter.