Why is it necessary to boost monthly investment regularly?

How will the value of your assets increase if you boost your regular payment by inflation or wage-increase? Instructions on how to avoid the surprise of the increase in price that awaits you, when you save with Finax.

Juraj Hrbatý | Personal finance | 13. May 2020

You won't live out of nostalgia

Do you remember those times, when the breadroll was 30 cents (1 euro cent), milk was 1.8 crowns (6  euro cents) and monthly rent was 300 crowns (10 euros)? It seems unrealistic, right?

However, at a time when the average monthly wage in 1989 was 3142 CZK (104 euro) prices for these services were normal. In thirty years, prices and salaries have risen. We economists refer to such a rise in prices as inflation. 

If you have decided to save for a long time, such as retirement, you have to keep one thing in mind. When you retire, you will not want to have a pension that seems quite decent today, but you want it to be enough for you at prices that will be present in 30 to 40 years. 

In 1989, the average euro-based pension was 68 euros. Imagine that you should live with such a pension today. Well, you might be wondering under which bridge you lie down to eat at least. 

What should be done to protect your pension or other long-term goal from the effects of inflation? 

Basically, inflation can be combated in two ways. A less painful way is to boost the monthly payment by the amount of inflation at least once a year. The second option is more demanding, but it brings better result - investing regularly higher amounts right from the start.

Increase regular payment for inflation

At Finax, we incline to the opinion that investing should be as simple as possible and burden the client minimally. Today, you have decided  that you will deposit  to Finax account  for example 100  € per month for your pension. This is probably the amount you can afford within your family budget. However, your budget is changing from year to year. 

Your income grows regularly as your employer increases your paycheck. In large companies this is also called wage adjustment. 

However, store prices are also rising, so the amount you save should increase as well. Let's show how much more you can save if you boost your regular deposit by the amount of inflation or by the value how jour wage increases. Such an increase should not hurt you at all. 

Let's work with the example of the € 100 that you decided to invest monthly in Finax. The average price growth in the EU has been around 2% in the long term. The average nominal wage growth in Slovakia in the last 10 years was 3.6%. This is a table of what your deposits might look like during the savings period.

 


It can be seen that if you regularly increase your deposit, the total amount of deposits can be up to double. In the course of ten years, the deposit increased from EUR 100 per month to EUR 119.5, respectively. to 137.5 is only a small increase. This is how the deposit graph would look cumulative.



But now let's show the most important things. How increasing your regular payment will affect your account value. If you decide to boost your deposit on a regular basis, you will significantly improve your pension or you will reach the goal you set yourself faster.

For example, if you boost your deposit by an average wage increase, the amount you have saved for forty years can be almost double.




This way of fighting inflation has only one disadvantage. Once a year, you need to sit down, recalculate how much you need to increase your payment and change the value of your standing order at the bank. Usually , people tend to forget. Therefore, in Finax we have decided to remind you once a year so you do not forget about the increase.

Invest regularly higher payments from beginning

In the modern world (apart from the transition from socialism to capitalism), the value of things will double once every 30 years due to inflation. For example, if you want to save today's 100,000 euros in 30 years, you should ask the algorithm how much you should save to achieve a value of 200,000 euros in 30 years. 

I'll tell you the horrifying truth, you will have to save as much more. It's cruel, but it works like this. Nothing can be done about it. However, in retirement savings Finax adapted its algorithms to take into account the level of inflation. 

If you tell us  in answer sheet how much you earn today, our algorithm will help you. It suggests how much you should save in order to receive a pension of 50% of your income increased by inflation for 20 years.

It may sound complicated, so let's look at the numbers. Today you earn 1000 euros a month in net and you have 30 years to retire. In order to maintain your standard of living, it will be important that you receive the same amount at retirement as when you were working. 

You can expect to receive around 50% of your paycheck from a well-set first, second and possibly third pillar. You have to save the remaining 50% yourself, for example via Finax. 

By the time you go into retirement, your income will be around € 2000 and the expected income from the first three pillars will be around € 1000. The Finax algorithm is designed to allow you to withdraw the remaining € 1000 over the next 20 years, which will also be valorised.

In this example, the Finax algorithm recommends investing € 126 a month: 

A brief summary at the end

The basic way to fight inflation is to invest. Because if you hold money in a bank account, its value decreases every year. But there are other tools to make your fight more effective.

If you invest regularly or have a specific goal set, it is important to remember what the value of money will be when you finish saving money. Increase your regular investment every year by your wage growth or inflation. Your account will grow faster and your family budget practically does not feel any charge.

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