How much and when should you invest in the renovation?

How much and when should you invest in the renovation? post thumbnail image

Finding the right level of savings can be difficult for anyone looking to earn high returns that, in and of themselves, are hard to come by these days. Interest rates don’t help either… Many factors such as age, household status, the impact of Schedule 1 taxes, debt, and retirement plans have to be balanced with the current lifestyle.

Therefore, it is important to know, depending on the net salary you earn per year, how much you should invest. However, first, it is important to know how to evaluate the most important factors to determine the right level of investment:  

Current expenses

The first step in the process is to have control over your monthly expenses. It’s not difficult to overestimate the ability of your savings, so it’s important that you base your calculations on your last three to six months of spending. To do this, it is important to know how to calculate your effort rate. In this way, you not only have an idea of ​​what you spend monthly on fixed expenses, depending on the net salary you receive, but you can also find unnecessary expenses that can be reduced.

Once you have a realistic estimate of monthly expenses, it’s time to distribute the surplus over three distinct areas: savings, retirement, and investment.

savings

Having a robust savings account can be the financial stability of any family, as it provides access to money with little volatility. A savings account helps you avoid having to sell stocks or withdraw money from retirement in emergencies, where you may suffer some additional losses due to lack of timing.  

If you don’t already have a savings account, the first order of business is to open one and allocate a portion of your salary until you have at least six months of fixed expenses.

Remodeling

If the salary you earn is not bad, you can bet on long-term investments, such as the Retirement Savings Plans, managing to obtain some tax benefits. For example, at the time of redemption, instead of being charged 28%, only 8% is charged. In addition, those who decide to bet on Retirement Certificates have 20% of the amounts applied deductible to the IRS collection, with the maximum limit per person being 350 euros.

A young worker may qualify for a maximum contribution, but may also need this amount to buy a house or start a family in the future. As such, the plans where the savings are applied must be appropriate to the age and capital available, and the younger you are, the greater the risk you incur, since you have more time to recover possible losses.

In such cases, it is prudent to make smaller contributions and use the rest for medium-term investments. The real estate business, which has been going down, could be a good bet.

Alternatively, someone on the cusp of retirement should prioritize retirement savings to reduce taxes and increase revenues during the “golden years”.

However, it should be noted that, in order to benefit from the tax advantages, they can only be redeemed upon retirement or from the age of 60, provided that five years have passed since the delivery. If it is before that, you can only mobilize them for long-term unemployment, permanent incapacity for work, serious illness (of the participant or any member of the household) or to pay mortgage loan installments.

As for contribution limits according to age, these are 400 euros up to 35 years old, 350 euros between 35 and 50 years old, or 300 euros for those over 50 years old. The second tax benefit was already mentioned above: when the plan is redeemed, the tax rate is only 8%.

Investing for Reform

Once the savings account is opened and the contribution to the retirement plan is planned, it is time to invest the (little) that is left over. If you have specific objectives already outlined, the investments must be adapted to them.

Investing doesn’t necessarily have to be restricted to just stocks and funds. Many investors diversify their investment portfolio by purchasing properties, valuables, collections, and other assets from which they can derive income and whose value can increase over time.

This diversification makes the portfolio less vulnerable to stock market volatility, but keep in mind that this asset category is considerably less liquid than funds and equities. We will then see two practical examples: the first of a 30-year-old single worker and a working father with a household of four people.

Investment example: João, single, 30 years old

Imagine that, after taxes, João’s monthly net salary is 1,800 euros, monthly fixed expenses are around 800, the savings account is 2,500, and does not allocate anything to retirement. Six months of accumulated savings equivalent to monthly expenses are 4,800 euros, so you must add 2,300 euros to your savings account until that limit is reached.

The maximum contribution to retirement, given João’s age, is 400 euros per month. However, the retirement age in Portugal is 66 years and 2 months, without penalties. That is, if João contributes this amount monthly in a PPR at an average annual interest rate of 1.5%, without fluctuations in amount and interest, up to the age of 66, he will generate savings worth 432 thousand euros. The interest you earn annually will translate into 7,200 euros.

Keep in mind that when it comes to PPR, tax benefits can increase disposable income in subsequent years, which can be used to make more investments. However, at this age, João will not need to worry about retirement yet, as there is still some time left. The stock market may be an alternative to consider.

Investment example: Carlos, married with two children, 50 years old

In this example, Carlos’ net salary is €2,000, due to tax benefits for having two children. Your monthly fixed expenses are around 1,200, including the home loan. The savings account is standing at 8,000 euros and the PPR is already at 50,000 euros.

Six months of expenses are equivalent to 7,200 euros, so it will not be necessary to allocate more money to the savings account.

At 50, the maximum contribution to retirement decreases to 350 euros per month. As the retirement age is approaching, it won’t hurt to take some risks and subscribe to a PPR without guaranteed capital, with a strong component of shares. In this case, in order for the yield to compensate for the risk, it is advisable for the investor to maintain the PPR for at least ten years.

For example, if during those ten years Carlos had invested 25,000 euros and, at the time of redemption, received 35,000 euros (after collecting the respective costs), a retention of 8% would be made – corresponding to an autonomous rate of 20 % applied to 8% of total earnings), calculated as follows:

(35,000 – 25,000 euros) x 8% = 800 euros

As you can see, Carlos would receive 34,200 euros net, since the 800 euros of tax would be withheld directly by the management entity.

debts

An exception to the above-mentioned points is the case of having a huge amount of debt. Those that come from car loans or credit cards traditionally have higher interest rates, so they must be paid first. In these cases, an important solution may be to compare and learn about the benefits of a consolidated credit.

On the other hand, other types, such as mortgages and training, are less urgent, in addition to having more benefits for the consumer. Don’t forget to transfer some money to your savings account at the same time.

Note

Investors who are unhappy with the current PPR can request a transfer to another, either of an equivalent or different nature (funds or insurance). The transfer fee charged is a maximum of 0.5%, and only PPRs with a capital guarantee can apply. Even so, the investor can request early repayment, paying a commission for early repayment charged by the PPR management entity.

Note that the amount you invest monthly must be adapted to the investor’s profile, managing to play with all the other variables: expenses, income, and savings.

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