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Only one in six people in Lithuania plan their finances: how to start in the New Year?

As the year comes to an end, it’s common to not just assess the period gone by, but also to pledge to do something new. Some people decide to take up sport, others to shake off a tiresome habit, and still others resolve to learn new things. Financial experts, for their part, suggest including matters related to planning and saving money on one’s list of resolutions this year.

That, by the way, may be relevant for the absolute majority of people in Lithuania. According to a representative survey of residents’ investment and saving habits commissioned by INVL Asset Management, one of the country’s leading asset management companies, and conducted in February this year, barely one in six people have a financial plan. Meanwhile, according to the data of this survey, 53 per cent could live off savings without changing their usual way of life for up to 3 months, 21 per cent could do so for up to 6 months, and 8 per cent could do so for up to a year.

What’s has to change for a financial planning pledge to not just remain an idea, but turn into actions that bring benefits? Dr. Dalia Kolmatsui, Head of Pension Funds & Retail at INVL Asset Management, offers specific advice on financing planning. And while the key is not forgetting that financial planning is a long-term process focused on the return over a dozen or even several dozen years, nevertheless, there’s still time this year to take advantage of one opportunity that will let you experience real financial benefits already next year.

“Financial professionals recommend having a financial plan that covers at least 10 years. So first of all you have to recognise that you won’t start seeing the benefits so quickly, and you may have to begin from paying off loans,” Dr. Kolmatsui says.

The starting point, she says, is clarifying one’s current situation and financial objectives. That means not just knowing how much steady income you get and what your expenses are, but also how much money you want to save in the future and for what goals, and deciding what type of financial “cushion” you want to have available for unexpected situations –it should be a reserve at least equal to at least 3-6 months of income for the family, also there should be another reserve if there are children or other dependants in the family. Then you determine how much you can set aside for saving and accumulation, how long you plan to do so, and how big an investment risk you can tolerate. “It’s of course always best to consult on these matters with a financial expert who can help to set up these parts of the plan,” says Dr. Kolmatsui.

The second step should be to assess your current needs and income. “Is there maybe something you can do without to allocate more funds to saving? Sometimes simple everyday things make it possible, over a long period of time, to save truly significant amounts. When you save a euro every day, the amount that builds up in the course of a year is not so small,” Dr. Kolmatsui notes. She also recommends taking a careful look at debts and repaying debts, for which you pay the highest interest for. It is also recommended to weight the expenditures for the valuable purchases and the ways to purchase them rationally.

The important third step is to assess your investment goals and opportunities and choose the best ways of investing. One is to look at the opportunities for pension accumulation in 2nd or 3rd pillar pension funds. Beyond that is the consideration of other saving or investment goals and planning how to pursue them.

You can explore on your own or seek advice from financial institution professionals about where and how you specifically can most benefit from investing and saving, what type of return to expect, and what further advantages you could get. As an example, the state encourages people to save and arrange a supplementary pension by offering tax benefit accumulating in 3rd pillar pension fund – it’s worth taking advantage of it in your long-term financial plan.

“Once you start investing, constancy is important. Periodically adding to a portfolio ensures that you’ll make investments not only when things are “hot”, but also when prices are down – and that means market fluctuations can be expected to not worsen your quality of life, but to maintain earning opportunities,” Dr. Kolmatsui says. She stresses that financial planning is a long-term process. Still, there are also certain steps you can take that may pay off more quickly.

“A personal financial plan clearly requires discipline and patience. The best incentive to undertake changes is the tangible benefit they bring. And you can experience such benefits right away: for example, if you’ve decided to accumulate a supplementary pension and start accumulating in 3rd pillar pension funds by year-end, then next year, when you declare income for this year, you can still take advantage of the tax benefit and get a refund of up to 15 per cent of this year’s contributions to 3rd pillar pension funds,” says Dr. Kolmatsui.

She notes 3rd pillar pension funds are attractive not only as a way to save additionally for retirement alongside 2nd pillar pension funds, but also for their flexibility – unlike with 2nd pillar pension funds, there are no limits on the number of funds or fund management companies, so you can invest in varied directions. That means, with proper planning of investment and saving tools, you can get a tangible amount of money refunded every year, Dr. Kolmatsui explains.

In assessing what amount of contributions could be refunded next year when declaring this year’s 3rd pillar pension fund contributions, several factors must be taken into account: the personal income tax benefit also applies to other expenses that reduce personal income tax (such as life insurance premiums, fees for university studies, and so on), and the total annual amount of those expenses may not exceed 25 per cent of the person’s annual taxable income or 2 000 euros. That means the maximum annual size of the personal income tax benefit applicable for any individual is 300 euros.

To ensure that 3rd pillar pension fund contributions are credited this year, Dr. Kolmatsui notes, it’s worth checking the deadline for transferring contributions to each specific fund. “Our recommendation to our clients is that they don’t delay, since the contributions have to reach our funds by 29 December at the latest, and just when the money gets transferred also depends on which banks the transfer is made between,” she says.

The survey of investment and saving habits conducted by Spinter Tyrimai on behalf of INVL Asset Management showed that 78 per cent of respondents have not prepared a financial plan for themselves or their family, with only 15 per cent saying that they have such a plan.

Among those that have a financial plan, nearly a third (28 per cent) said they plan for a period of 2 years, a quarter (26.5 per cent) have a financial plan covering up to 5 years, 16 per cent have one for up to 10 years, and one-fifth of them have a plan for more than 10 years. Respondent groups which were more likely to have a financial plan included women, those aged 26 to 55, and those with higher income. Women and people who live in cities more often have a plan for up to 2 years. During the survey, 1 011 Lithuanian residents aged 18 to 75 were interviewed.

INVL Asset Management is part of the Invalda INVL group, whose companies manage pension and mutual funds, alternative investments, private equity assets, individual portfolios and other financial instruments. They’ve been entrusted by more than 185,000 clients in Lithuania and Latvia as well as international investors with over 575 million euros of assets.

This information of a promotional nature cannot be construed as a recommendation, offer or invitation to invest in funds managed by INVL Asset Management or other financial instruments. When investing or accumulating in pension funds you assume investment risk. Investments can be both profitable and loss-making: you may not obtain financial benefit and you may lose some or even all of the invested amount. The past results of investments do not guarantee future results. When deciding whether to invest or accumulate in the pension funds, you should assess all investment-related risks and key investor information documents. INVL Asset Management is not responsible for inaccuracies or changes in the information, or for losses that may arise when investments are based on this information. The size and applicability of the personal income tax benefit depend on a client’s individual circumstances and in future may change.

A participant of the 3rd pillar pension fund can choose among the following ways for receiving pension disbursements: one-time pension disbursement, partial periodic payments, or purchase of an annuity from an insurance company which provides life insurance (read more about annuities at: www.lb.lt/pensiju_anuitetas). When seven or fewer years remain before retirement, we recommend considering investing in the conservative investment pension fund. When participating in a 3rd pillar pension fund, you will be required to pay the fees specified in the rules for the selected fund. More information about the pension funds managed by INVL Asset Management, their rules, investment strategy, risk, applicable fees and personal income tax benefit – at www.invl.com.

Financial advisors note that investment instruments should be selected in accordance with the degree of risk one tolerates, the expected return, the investment period and one’s financial situation, taking into account the fees that apply to the instruments and diversifying the funds that are invested.