Moneezy's Guide to Personal Finance 2022

This guide gives you the tools necessary to take your personal finance to the next level. With everything from cashflow overviews and budgeting, to habit change and loans 101, we provide you with all the knowledge you need in order to find your way through the economic maze and ensure an economic future under your control.

Do you have any goals for where your economy is heading? Or are you buried in debt, lying awake at night worrying about the future?

Whatever your situation, being in control of your finances is always something to strive for. For many, the mere thought of financial structure is too much to take on. With a plethora of contrasting financial advice out there, it can be difficult to find the odds and ends of them all. Exactly how easy are the “5 easy steps to financial freedom”?

Throughout this guide, we will get an overview of the many aspects of personal finance and how they might affect our everyday life.
Firstly, we will take a look at what goes in and out of your account, to establish your current cash flow. With that in mind, we will look into what you are budgeting for, whether that is a new property or just more financial freedom. A goal of some sort. To aid the journey towards the goal, we will consider some of the popular budgeting templates, discuss secondary income methods, and clear some things up about the unpopular word “budget”. Shortly after, we will illuminate how loans are misinterpreted as a last-ditch attempt, rather than an opportunity to increase your financial footprint. Lastly, we will compile some takeaways and a round of the guide. 

But before we dive into the actual guide, we need to get a grasp of what goes on in the world at this very moment. Things outside of our jurisdiction.

The things we cannot control

As the media has portrayed lately, politics and war are just some of the factors that play into the financial picture in countries around the world. With the current conflict between Ukraine and Russia, the distribution of fuel and gas have been put on hold, causing a significant price increase. Similarly, distribution issues have caused an increase in the price of resources like food and construction materials. This is far from harmless to the everyday consumer, as food and petrol are the fundamentals of most people’s lives. In the US for example, around 85% of the workforce, or around 130 million people, drove to work in 2019, before the pandemic. With the price of fuel doubling over a short period, the livelihood of most Americans has been in jeopardy. Additionally, students living paycheck to paycheck is not uncommon in most countries. Without sufficient financial support during education, they will face the impact of increased prices.

Furthermore, with inflation rates as high as 8,6% from May 2021 to 2022, living paycheck to paycheck just got a whole lot harder[1]. Combined with an increase in production price, and therefore often a cut in wages, you have decreased funds that are worth less. Setting money aside for the future seems to be a dream, rather than an option for most. And even if you manage to set money aside for future investments, how much is it going to be worth if inflation continues to threaten? 

Additionally, the supply chain has suffered immensely because of Covid-19, causing major delays in globalized shipping due to infrastructure issues, as well as increasing the price of shipping containers going overseas by 400%. This sudden spike in price comes from the recent interest in eCommerce around the world. As a result of the pandemic, traditional, physical stores offer a safer alternative. This imbalance between offline and online stores has resulted in a surge in demand for direct-to-consumer shipping, especially in the fashion department. With the ability to try on clothes at home and return them without fees, the shipping industry is turning its head in search of a solution. Some have been using kitting, i.e., shipping wares in monthly subscription boxes, rather than in 7 individual packages. Others have turned towards the sky, as air freight has become a more plausible solution, even for the smallest of packages. Air freight circumvents port congestion, as well as providing a more streamlined process from A to B, avoiding supply chain issues. However, the environmental impact of air freight might be worse than traditional shipping, even factoring in the possible delays and inefficiency.

We have put a lot of emphasis on the US so far, and that might not seem very beneficial for someone living in Bulgaria, Kazakhstan or Argentina. But the truth of the matter is that geopolitical issues have a worldwide effect, as seen when Biden took over for Trump in January of 2022. His speech on future endeavors caused fluctuations in the stock market, catalyzing the market for green energy. This change might cause countries to change their evaluations of where to put their money, perhaps investing in green energy. This could result in more money for researching how to increase battery life on, for example, electric vehicles. This in turn makes electric vehicles more attractive, in collaboration with certain governmental price adjustments or limitations to vehicles using fossil fuels, in order to sway the consumers. Suddenly, the car you have been saving up for is much more likely to be an electric car, all because Biden said he would focus on green energy, to save the planet.

The abovementioned has a huge impact on our society, but it is hard for you and I to do anything about it. Yes, small changes can be made in communities in the neighborhood, but worldwide trends are merely something to be aware of. But it is not all doom and gloom.

Something you can take control of is your private economy. With inflation and rising prices of goods, it has become increasingly more important to take control of your economy. You might have an idea of how much you spend, but have you ever gotten an exact overview of your cash flow and expenditure each month?

Cash flow

Whatever the situation, gaining an overview of the situation at hand will provide you with important knowledge of what your next move is going to be. If you are not sure what people want to eat at a party, ask around for preferences and places, that way you will make a better decision when it comes to ordering. The same is true for your finances. Getting an insight into where, and how frequently, you spend your money is an invaluable resource to have going forward. Your cash flow consists of three different topics: your fixed expenses, your fluid expenses, and your income.

Fixed expenses

Your fixed expenses consist of all the different expenses that occur at fixed times. This can be weekly, monthly, bi-annually, or even annually. These are your non-negotiables, the expenses that you do not have a saying in changing. Fixed expenses can be things like rent, food, heating, and water bills, as well as health insurance, car insurance, etc. These are the payments that you should always be able to afford since this is the foundation upon which you can freely use the money, you have left.

Variable expenses

Your fluid expenses are all the things you use your money on, once you have paid all of your fixed expenses. This can be drinks with colleagues, indulging in hobbies, and other aspects of your life. These are the things in life that are nice-to-have, but not need-to-have. Somewhere in between fluid and fixed is where you find monthly subscriptions for streaming platforms, gym memberships, or other subscriptions. These expenses, contrary to your fixed expenses, are all lifestyle-dependent. If you are focusing on fitness and well-being, you might have increased your spending on organic food and supplements, as well as a gym membership. However, since you are spending more time in the gym, you are less likely to go out drinking with your friends or ordering fast food. This habit-related look at finances can be a great tool when you are considering how to plan your budget, but we will look more into that later on.

Income

Your income consists of all of your revenue streams, whether that is from your primary job, secondary hustle, or the extra cash you get from helping your grandmother every other weekend. This is the amount of money that should be able to cover your fixed expenses, at the very least. When considering how much money you earn each month, only focus on the ones you are sure you can rely on, like your primary job. Moving your grandmothers’ lawn can be great in the summertime, but once winter comes around, relying on that revenue stream might cause some issues. This way, you will more likely have money left over each month, rather than overspending and ending the month in the negatives. 

Once you have collected everything for your cash flow, you can begin adding income up against your expenses, and see if it checks out at zero. A negative balance indicates that you are spending more money than you have available, however, a positive balance tells you that you have money to spare each month. Using a spreadsheet like excel is a great way to see how you spend your money. Not only are the numbers right beside each other, but you can use the data to create graphs like a pie chart, to get a visual representation of your finances.

Equipped with an overview of your cash flow, you can start considering what it is you are budgeting for, perhaps a goal of some sort.

A quick talk about goals
When you are considering getting your finances in check, it is often in connection with a purchase you would like to make in the future. It might be a cross-country move or buying your first house. It might be that new mountain bike you have been eyeing at the store, or perhaps you are saving for an occasion with that special someone in your life. Whatever the intent, a goal is great to have in mind, as it can motivate you when you are struggling to maintain the budget you have set for yourself. For some, it can be the driving factor in completing your goal in the end. But for others, it can be too far-fetched to motivate you through it all.

You should check in with yourself before considering making an overarching goal. Just like when people attempt to learn a new language, a goal like “being able to speak fluently” is way too big to motivate you. There is no short-term satisfaction in sight when beginning, which is why it requires a lot of motivation and willpower to push through. Similarly, your financial goals shouldn’t be “financial freedom” or some other big goals, but rather a series of milestones or achievements. It could be paying off a percentage of your house or accumulating an amount of money which can be invested in stocks or used to create other passive income streams. Or perhaps all of them! Whatever fits your situation, setting a couple of milestones is a great alternative to a single big goal. That way you will have short-term milestones which will give you bursts of motivation, whilst having a long-term goal to aim towards. 

Another trick to aid motivation is accountability. Whether that is family, a friend, a partner, or even an online community, having someone to hold you accountable for your goals is a great way to increase your odds of succeeding. No one wants to be a disappointment to the ones around them, which will push you to continue. This is why something like committing to work out twice a week is easier with the help of a friend, or by joining a gym class. Studies show that success rates increase from 50 to 65 percent when committing to someone that you will succeed[2]. Without a plan or a time, success rates fall to as low as 10%. This is why budgeting towards something can be half the battle in itself.

Budget

Now that you have an overview of where every penny goes each month, you are now prepared to start setting a budget to reach your milestones and goals. When the word budget is tossed around, negativity often follows. And no wonder, since everything we read about budgeting has a negative connotation behind it. But budgets are not as bad as you think. If it was not for the budget, you might not be able to one day buy that new car, that greenhouse, that terrace, or the new computer you have always wanted. Additionally, by meticulously dividing your income out to all the aspects of life that you want to indulge in, you make sure that you can do it all.
Despite what you might think, budgets are made to ease your financial worries. Staying inside the budget you have set ensures economic stability for the future, and acts as a barrier to reckless spending, something we are all guilty of doing once in a while. If you have a tendency to break your budget, it is time to make a new and updated one, since the previous one is simply not realistic. That is exactly what people often get wrong about budgets. A lot of people give different figures on what to save or what to invest. For some, setting 20% aside for pensions, and saving 30% for future investments works great, but that is not the reality for all of us. As previously mentioned, with an increasing amount of people living paycheck to paycheck, setting aside half of your income for future use is not a reality.

We have selected a few strategies that highlight different key focuses, which can be great to work off of. Later, these can be personalized to your life situation, in order to make sure that they are sustainable to your living situation. The numbers play a less important role, it is rather the concept.

The all arounder – 50/30/20

One of the most common strategies is the 50/30/20:

  • 50% goes to your fixed expenses, your non-negotiables like housing, food, insurance, and so on.
  • 30% goes to personal spendings, this is travel, entertainment, hobbies, restaurant visits, etc.
  • 20% goes to your savings, whether that is for retirement, future investments, or anything else.

This budget strategy works for a lot of people, as it is a great overall strategy, that ensures a little bit of everything, while still being able to enjoy yourself meanwhile saving. This kind of budgeting often suits individuals with a decent revenue stream, since half can be used on wants and savings. If you are earning more than you need, but still seeing your money disappear on various things here and there, then this might be something that suits you. Setting aside a fifth of your income at the beginning of the month might be the restriction you need to stop spending recklessly. Especially if you are in a position where your cash flow will not see major changes in the coming years, so you are sure that you do not need the money immediately.

Every cent counts – Zero-sum budget

Are you the kind of person to plan ahead of vacations, planning every day down to the hour to maximize your vacation? Or perhaps your weekly calendar is color coded and planned down to every minute? If you are being meticulous about everything else, why not include your finances in that? The zero-sum budget is called so because it allocates every single bit of your income. Where all the all-rounder makes bigger groupings, the zero-sum budget sections your income into small groups like food, rent, travel, insurance, and so on. Rather than covering your fixed expenses and then seeing what you have left, you allocate a certain amount of money to the different groupings and stick to that. This makes it so you have nothing left at the end of the month if your budget holds. If you want to save for something special, you would allocate a sum for savings, and then spread the rest out to the other groupings. This creates a more stringent budget with little wiggle room, but ensures that every cent is well spent.
When using a zero-sum budget, you need to make sure that you are allocating some money into an emergency fund of some kind. Without it, sudden expenses can be devastating for this kind of budget.

Me, myself and I – Pay yourself first

You might have gotten influenced by others around you to consider insurance and savings a bit more, in order to ensure a great future. To ensure that you cover all the different things like pensions, insurance, and even future plans like house upgrades, you elicit some funds for those goals first. This ensures that you have those goals taken care of, and you can spend the rest of your money on everything else that needs to be paid. This way of budgeting is for those who can endure a tighter budget since you choose to pay yourself first, and then pay your fixed expenses, rather than the other way around. However, since you pay off pensions, insurance, and so on as soon as you get your paycheck, you will not have to consider saving some of the money you have left over during the month, leaving you with money to spend without a worry.

Make it yours

The different budgets mentioned above are just some of the options you have for creating a budget of your own. And they should only be seen as templates because as is proven, again and again, it works better if it is personalized to your liking. If you have a tendency to disregard your budget, make it easier to maintain and start slow. FIRE budgeting, Financial Independence - Retire Early, is not suitable for everyone, since the cost of living and other dependencies might be higher for you than for others. This budget strategy strips away all costs and focuses on total frugality. This then allows the individual to make a big purchase in stocks or similar passive income sources, allowing them to live off of dividends and other sources for the rest of their lives. 

The most notable issue to take with that strategy is that it assumes that you want to get it over with. Despite saving for something big, the journey towards that goal should at least be a little bearable. No matter how cliché it might sound, it IS about the journey, not the goal. Unless you are incredibly motivated, frugal living at that level is hard to keep up with. Most budgets focus on small savings over longer periods, which drastically increases the likelihood of success since it does not take a giant toll on your everyday life.

When choosing where to reduce spendings, consider which things in your life have great value. Perhaps you spend a substantial amount on soccer gear, such as new cleats, windbreakers, and other accessories. But if you play soccer 4 times a week as an avid soccer player, that might not be where you should cut costs. Taking away from what brings you joy might not be the best solution to saving, as it most likely won’t be sustainable in the end. If you tend to order takeout when coming home from practice, that might be a place where you can save some money by meal-prepping for the days you have practice.

Habits are worth a lot of money

Similar to the abovementioned scenario, there might be places where you can save some money by establishing simple habits. Take a second and think about what your mornings look like. Perhaps you have a tendency to snooze in bed until the last minute, before rushing out of the door. Because you rushed out of the door, you grab a coffee and some breakfast on the way to work. As a result of your drive-in delay, you might miss the window for parking in the free spots, and are forced to pay for parking.

This is just an imaginary morning, but there are definitely ways in which a few habits can save you a lot of money. The price of ordering coffee and breakfast to-go can quickly ramp up over months, but as a result of daily occurrence, you might be blind to changing this routine, because it has become exactly that - a routine. Breaking up unhealthy everyday habits can have a huge impact on your finances, no matter which changes you make. Even spending more money can have a greater impact on your life than you realize at first. If you buy clothes of low quality in high quantities, you might not realize how much more it tends to cost in the end, because you are buying in small dosages. A great quality sweater might set you back a lot of money in comparison, but you tend to take better care of it, since it works more like an investment, in comparison to that cheap one you found on sale and bought on a whim. Overall, the more intentional you are with the things you purchase, the more likely you are to spend less money. Methods, like keeping products in “the cart” for a couple of days to reconsider if you really need that product, are a great way to reduce your reckless spending. Whatever your financial vice is, it is important to remember that there are hidden expenses in the way we live our lives, not necessarily where we swipe our card. Try jotting down some places in your life where you might be able to create financially healthier habits.

Secondary income

Side hustles

Streamlining your everyday life to save money does not only apply to your work. Whatever you do in your spare time off work, there is a good chance that you can transform it into a side hustle of some kind. Perhaps you enjoy playing golf with your pals after work and have gotten quite proficient at it. In that case, you might consider becoming a coach of some sort, perhaps for kids. That would require a few hours of practice per week, but if it is something you enjoy, it might not feel like work and would earn you a good sum each month. This is especially great if you are a student or have a lower income because the wage for being a coach is quite substantial if you are just missing a little extra each month.

Other options could be restoring or transforming furniture from Facebook Marketplace and selling it for a profit. Perhaps you could start a little side business like moving the lawn or being the IT support in the neighborhood. Wherever you see a market for making a little extra cash each month can heavily influence your finances if you capitalize on the opportunity.

"If you are good enough at something, you will eventually find a way to monetize it”. Whether that is gaming, make-up, fitness, embroidery, or anything else, if you have the skills, you can publish written guides for beginners, videos on YouTube, or collaborate with bars and communal spaces around your municipality. Not only will this give you a secondary revenue stream, but it will also fill time in your day-to-day life, which for many can be the time when they spent money on pleasurable things. Furthermore, having a secondary revenue stream allows you to have days where you order take-out and take shortcuts because you have earned it. It gives financial wiggle room, to cover those bad days when you are not motivated to make dinner. 

Passive income

This advice is more geared towards those budgeting for bigger things, like buying off your house or making a substantial investment in a certain asset. There are lots of income sources that provide passive income each month. One of the most notable is investing in stocks and shares, as it can be an investment that month after month provides a certain amount of returns. Below, we have created a small Stocks for dummies, to offer you a quick overview.

Investments for dummies

Stocks are essentially the opposite of a bank. You lend a certain amount of money into governmental or company stocks, which is then used to further things for the company, like upgrades or new strategies, similar to how you might need money for renovating the bathroom. The money is then slowly paid back to you with returns, just like you would to a bank, as a payment for offering the money upfront. Depending on the country, governmental stocks might be a safer option, as it is more regulated and meticulously planned than it would be for a company, whose expansion plan perhaps is not as clear cut. Investing in company stocks is around as risky as investing in company shares.

Shares work a bit differently than stocks. When you buy a share in a company, you buy a piece of that company. This is why people have different sayings about where the company is headed, depending on how many shares someone has in a company. CEOs of companies often choose to give their employees an opportunity to invest in stocks as a part of their paychecks. This makes sure that they know where their money is headed, and what it is spent on. Similarly, if you buy a couple of shares in a company, let us say 3 out of 100.000, you own 3/100.000 of that company. Often the number of shares is much higher, but for the purposes of this example, we will keep it at this number. The company thanks you for lending them money towards expansion by giving out a percentage of the company earnings to you, as you own part of the company on paper. 3/100.000 corresponds to 0,003 % of the company, so you are eligible to 0,003% of the company’s earnings. On paper. But how are you paid back then?

The head of companies choose how the investors are paid for their belief in the company. Some CEOs choose to allocate a lot of money to the long-term success of the company, whereas others might pay investors something called dividends. Dividends are small amounts of money pr. share that is paid to investors, and are often regarded as a signifier that the company is doing well. Financially healthy companies can pay their investors back without hindering their progress, while others might need to use every cent they have to stay afloat. But as an investor, even though the dividends sound great, you would rather have shares in a company that is doing okay, rather than a company which has bankrupted themselves because they wanted to pay their investors back. Therefore, not receiving dividends is not always a bad sign, just a sign that the money is put elsewhere to ensure investor satisfaction. 
Shares are set at a certain price, which fluctuates up and down, depending on how the company is doing, and how many people are buying the shares. As mentioned in the introduction to this guide, the scenario of Biden talking about green growth might cause people to buy shares in wind- and solar power, increasing the price of that specific share. But why does the price go up?

Riding the wave

The price of a share is dependent on a couple of factors. The one mentioned above is about the news. News around the world makes a huge difference in the portrayal of a company in the media, not only bad or good news about the company itself but more importantly news about the area they are in. As of writing this, the democrats in the US have agreed upon a gigantic climate- and energy package, which has sent stocks like Vestas up by over 15%. This is the impact news can have on shares. The opposite has happened to oil and gas companies as a result of the diversion of focus.
Another factor is supply and demand. If the demand for a share suddenly surges, the price will follow. This is basic supply and demand. If the supply does not match the demand, one of the factors will increase/decrease to create a new balance. The more people want it, the higher the price point, since it has become more lucrative. If a company reaches a point where the supply cannot keep up with the demand, the share is shortened, in order to re-establish balance.
There is a plethora of other influences on shares, but they are beyond the scope of this guide. If you are interested in stocks and shares, there is plenty of information to be found on the subject on YouTube, or by contacting your bank. They will provide you with the advice needed for making better decisions on the stock market.

Upfront investment for long-term income

If you are proficient at something, making YouTube videos will perhaps grow into something big over time. However, if you are feeling up for it, creating a course on a specific skill might be a great investment. Say you are a videographer and have been doing it as your primary line of work for some years now. You can create a class on using light, perspective, freelancing, or something else. This will take some work upfront, but once the class is up, you will be able to earn a small amount each month, fluctuating depending on the number of attendees. Try to read the room and create a course that sounds lucrative to the market, in an effort to catch the waves. Sites like Skillshare and Masterclass provide a premade platform, but you can easily make it yourself. This depends on how confident you are in the process of sharing your course. If you can get a lot of people to sign up for it by promoting it everywhere, you might be better off on your own. But if your social media presence is not something to brag about, handing over the responsibility might be in your best interest. You will not receive the money when someone signs up for the course (since the whole site is subscription-based), but teachers earn between 0.05- and 0.1-dollar pr. Minute watched. This can quickly add up over time, giving you a solid secondary income.

Now that we have established how a budget is invaluable to the success of your goals, we should consider another factor that might give you a head start on this journey, which is loans.

Loans

You might have heard from people who are so deeply buried in debt, that their lives are ruined, who tell you that loans are the devil’s work. Despite 1 in 6 Americans having substantial student loans, this is not all doom and gloom. People in business around the world see loans as an opportunity, rather than a negative thing in their lives. It is all about perspective.

Let us imagine that you are looking to invest in solar panels for your roof since your electrical bills are steadily rising. Taking a look at your bank account as of right now, you are not able to pay for the panels and their subsequent installment, which might prompt many to consider it “out of their reach”. But this is where perspective plays a huge role. If you think of loans as a last-ditch effort and correlate loans with debt and ruined economies, then it might be considered an unlikely option. On the contrary, if you see loans as an investment into your future, the investment sounds more reasonable. Solar panels might be expensive upfront, but over the next 10-15 years, they will have paid themselves back, and continue to save you money from that point on. The amount of money you save during the first years can be put towards paying off your loan on the solar panels, and before you know it, you would have paid off your loan. Suddenly, the electrical bill is lowered each term, and the value of your house has increased dramatically since it is future-proof.

That last part is the most important one. Investing is only investing if you are buying into something that will increase over time. The value of your house has increased since you have upgraded the energy ratings of your property.

Now think of yourself as the house and a master's degree as solar panels. Even though you are slowly paying off your loans over the next 10 years, you have invested in yourself and the future, improving your salary expectations, as well as expanding your skillset. The same is true for being an apprentice or intern. The payment is sometimes next to nothing, but offering to work some hours for free might give you the experience in a certain field to continue down that path with more tools in your belt. Interning at a company you admire might reaffirm your admiration and point you towards building something similar. 

It does not matter how much student debt you are in as off right now if you are expected to be able to pay it off in a couple of years with the future salary you are working towards. Of course, to a certain extent, but you get the idea. Most people can withstand a good amount of debt, as long as they are expected to be able to cover it over a couple of years in the future.

As a rule of thumb, never invest in a depreciating asset[3]. Tools like your car and your phone will depreciate in price the moment you start using it. However, your house will see improvements in its evaluation if you have installed a new deck, re-insulated it, or perhaps renovated the kitchen.

With an improved perspective, we can look at what goes into a loan, as well as a few tips and tricks to avoid some of the traps that people fall into regarding debt and loans.

Preparation

Up to this point, we’ve gone over the current state of the world, as well as looked into the cash flow in your economy. Furthermore, we’ve begun looking for places where you might be able to save some money by establishing healthier economic habits, like bringing a thermos of coffee for your commute instead of buying coffee on the way. We have also considered our goals and what we are saving/aiming for.

Continuing our talk about investing in yourself or other appreciating assets, let us take a look at what goes into taking out a loan. I would love to give a specific example of the specific ruleset loaners have to follow in every country, but that is way beyond the scope of this guide. Instead, I have made some overarching categories, which include payments that often occur when creating a loan. Whether these different fees apply in your country depends on the laws surrounding loans that your government has introduced. However, there is a high probability that you have something similar in your country.

Amount

Initially, we should look at the amount. The amount of money you loan should correspond with the goal in mind. Building a new deck or renovating a bathroom requires a different amount than when investing in property. Most banks allow pretty much everyone to make small loans to realize small goals, but bigger loans require an evaluation of your economy for them to assess the risks they take. In most countries, this can be done online as well as offline, but the process is similar. You request a certain loan, and the bank will then assess your financial situation, in order to give you an offer on a specific loan. This is also where they consider the rate of your loan.

Rates

For every loan, there is a certain rate associated with it. Rate describes the amount of money that the bank gets paid every term, as a payment for allowing you to loan. This amount could be anywhere from 4 to 100% of the original loan amount, depending on the loan amount and running time, as well as regulations in your country. A loan of £10.000 with a 12% rate would cost you 11.200 £ to pay back in the end. This is without considering other fees associated with the loan but from a strict rate point of view.

Runtime

Runtime describes the amount of time you have before the loan has to be paid back. When considering taking up a loan, you should already have a plan on how you are going to pay it back. Small loans are often paid back quite quickly since the amount is often small enough to divide out and pay in 12-24 months. Bigger loans like home loans and similar loans are of course paid back at a much slower rate since the amount of money is quite high compared to your daily income or your savings. Most couples take up a loan for their house, then pay it back in the following 10-20 years, depending on the price of the house, as well as the couple’s income. Despite it being lucrative to only pay back a tiny percentage every month, the added costs of the running rate can rise to incredible amounts over time, often exceeding the original loan amount as additional fees. Therefore, you should make sure that you pay off as much as possible each month, to decrease the number of months you have to pay rates. That said, you should not set yourself up to pay so much that it breaks your budget and becomes increasingly harder to keep up with. Before agreeing on a loan, make sure you have created ample space in your budget for the payments that are associated with the loan. Consider making different budgets for different runtimes of your loan, to see how big of an impact cutting off 6 months of rates will have in your everyday life. If it fits in with your budget easily, it could save you some money in the long run.

Terms

The word term covers the number of times you have to pay for your loan annually. Most people set up their loans to have a monthly payment. This allows them to not have to think about putting money aside for a quarterly or bi-annual payment. The downside to 12 payments pr. year is what is known as the interest of interests. Let us go back to the example of the £10,000 loan from earlier to understand this concept. If you were to pay a 12% rate on the loan pr. year, and paid twice a year, the calculations would look like this:  £10,000*1,06^2 = £11,236. The 12% is divided by the number of payments per year, terms, and is then calculated similarly to the formula above. If it was paid monthly, the payments after the initial 12 months would have been £11,268.25, following this formula: £10,000*1,01^12 = £11,268,25. The difference right now is only £28.25, but this could go on for years, and perhaps at a much higher loan and/or rate. This is not to mention some of the fees that might follow the payments.

Fees

Most loans will have a starting fee, which you will have to pay to create the loan. Often, the fee is calculated into your price pr. term, and divided out between the runtime. Furthermore, in most countries, there are services to manage your monthly payments for a tiny fee. For short-term loans, this probably will not make a huge difference, but over 10-20 years for a housing loan, the costs of the management can add up. Most places will take anywhere from £ 1-5pr. Payment, which is not much for managing the payment each month. But with monthly payments each year for 20 years, that is 240 payments, which can be as much as £1200. Most banks have the ability to create monthly payments, which also cover loans. Most banks have an intuitive site to use for payments, but if you are ever in doubt, contacting your banks for a quick introduction is always an option. Your payments will be made automatically, just like some services, but avoiding the fee. 

The abovementioned categories serve as an overall introduction and open up a plethora of subjects to look into, before taking up a loan and making your investments. Similar to videos on stocks and shares, there is a great deal of information on loans regarding your country on YouTube, and probably on your bank's website as well. Despite the daunting amount of information, once you have understood the basics depicted in this guide, you will have a greater understanding of the loan you are about to take up. Yes, there might be additional fees or other names for the abovementioned categories, but the gist is the same. Do, however, make sure to check your specific bank for certain fees and percentages, to make sure the loan is realistic.

Where to search

Once you have decided on a loan amount and runtime, as well as planned a budget for paying it back, you can begin looking for loan offers. During the last 10-15 years, the process of taking up a loan has been expedited to the internet for many banks. From the comfort of your own home, you can search around for offers on exactly the loan you are looking for.
Traditionally, you can visit banks for a conversation with them about your loan. In order to get a good offer, you will have to bring your last couple of paychecks, as well as an overview of last year's spendings. This might seem like a lot of information to bring to a bank you are not sure you want to engage in a collaboration with, but it is for a good reason. Bringing paychecks and annual economic reports gives the bank a more realistic view of your yearly income and your revenue in general. This allows them to give you the most realistic offer on what they can afford to risk on you. Yes, this might seem shallow, but whenever banks set up a new loan, it is based upon a risk-reward assessment. If a stranger came up to you and asked for a loan from you, you would not give the money out just like that. You would ask them about their finances, perhaps about their life, and you would need to assess whether this is too risky. The same process is true for banks. The less risky, the better the offer. If you have a stable economy and are looking for a small loan, chances are that the bank will give you a great offer, because it is an almost risk-free investment. They give you a lucrative offer, and they get a percentage of the loan over the next two years. That is the dream scenario. The riskier the loan seems from the bank’s perspective, the higher the rate will be. You might know this from car insurance, where young, inexperienced drivers are charged more than older, experienced drivers.

If your connection with your bank is less than desirable, you might opt to look online for other opportunities. In the last 10-15 years, online banking has been growing rapidly, with banks around the world offering fast and easy transfers of money, all without meeting the bank face-to-face. Bigger loans might require some patience before the loan is set up, but smaller, less risky loans can be transferred in a matter of hours.

The process of taking up a loan might look like this:

  1. You decide on the amount and choose at least the three or four banks with the best offers.
  2. You send an application, which consists of your desired amount, as well as all the information about your financial situation that you have.
  3. The bank will respond to whether they would like to create a loan for you. This will be with a polite no, or a contract with all the information necessary about the details of your loan if they accept the offer.
  4. You read the contract in detail to make sure everything checks out. You then sign it electronically and send it back.
  5. Within a couple of days, the money will be wired to your account.
  6. Start spending!

The focused reader might have noticed that under step one, it says “three to four banks”. That is because it is free to send out applications for loans to banks. We highly recommend only choosing one bank to work with, however, make sure you send as many applications as possible, to ensure you are getting the best deal.

When looking through contracts and offers, you will most likely be met with an equivalent of what is known as the APRC, the Annual Percentage Rate of Charge. This number represents a collection of all payments of the loan, including fees and rate, which is then divided by the runtime in years. The number is often represented as a percentage of the amount, I.e., 17,5%. This number can be a good indication of the cost of your loan, but should not be the only factor you look for. Hidden in the number are startup fees, as well as high rents, which might not be desirable. Especially for bigger amounts. With big loans, running over 10-15 years, the APRC might only be around 6-7%, which sounds like a good deal. However, this number represents a big amount, divided over a lot of months, so naturally, the % is quite low, as it is the rate of charge, compared to the loan amount. Make sure that you look at the rate, and also look for unwanted fees before you decide which offer to go with.

In the midst of all of these details, it can be hard to keep track of everything and compare the banks in each category of payment. Luckily, sites like Moneezy make it easy for you to quickly find the bank that offers the best conditions for your specific loan. Simply adjust the sliders on the site to match the amount and runtime. You are then presented with the best offers from a plethora of banks in your country, and also crucial information like the information given in this guide. Then, you can click on the “apply now” button to easily be transferred to the specific bank’s application site.

Takeaways

That was a lot of information.

The private economy is a complicated and ever-evolving subject, with hundreds of small subjects that can be further researched. This guide has served as a surface-level introduction to the different aspects of your economy, with the mission of informing as many as possible. Despite its small size, gaining an insight into the intricacies of the money that surrounds you, shifts the power into your hands. From considering your cash flow, to changing habits and budgeting with a goal in mind, every small change will have a huge impact on your life.

This guide was written from a Danish point of view, which involves a lot of privilege in the financial sector. As mentioned throughout the guide, there are options that might not be feasible in your specific financial situation, but there will always be some parts that are applicable to almost everyone. Especially the advice surrounding habits and routines, as it transcends financial situations and applies to everyone. As with every good book, it is the readers’ interpretation that matters the most. Examples can be personalized, or ideas around a side hustle might be put into the context of your own life.

Making healthy financial decisions is a marathon, not a race. As James Clear mentions in his book Atomic Habits:

"You do not rise to the level of your goals; you fall to the level of your systems."

Creating a framework allows you to rely less on fleeting aspects like motivation and dedication, and more on constants like habits and routine. The earlier you start budgeting and taking control of your finances, the quicker you can begin making moves and setting yourself up for financial stability in the future.

Good luck on your financial journey!

Best regards,

The team at Intelligent Banker

[1] https://www.bloomberg.com/news/articles/2022-06-10/us-inflation-unexpectedly-accelerates-to-40-year-high-of-8-e

[2] https://www.afcpe.org/news-and-publications/the-standard/2018-3/the-power-of-accountability/

[3] https://www.businessinsider.com/personal-finance/when-to-use-debt-to-build-wealth-financial-planner-2019-7?r=US&IR=T

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