The path to growing your money

Martin Mets

Why start saving?

You will attain peace of mind

If you don’t have any savings, each unexpected expenditure has the potential to cause problems with your financial situation and exact a toll on your mental health. For example, a water-related accident at home may result in a situation in which you are forced to take a high interest short-term loan in order to perform urgent repairs. Based on a questionnaire completed in the United States, money worries are the leading cause of stress among people. Constant stress has an adverse effect on health. For example, it increases anxiety, raises blood pressure, promotes over eating, and causes bad dreams and depression.

You can make your biggest dreams a reality

If you have savings, you can make your dreams come true, for which you need money. For example, you can save money for purchasing your own home, performing home repairs or taking your dream trip. If you leave the realisation of your dreams to chance, they may be left unfulfilled. A realistic plan of action is therefore the first and most important step, to ensure that you can make your dreams come true.

You also ensure your financial security during old age

The most common reason that savings are put aside is the wish to maintain one’s good financial position in old age, when salary related income has dropped. It is well known that the income of a person that is retiring shrinks significantly. At the same time, studies show that nearly half of people experience an increase in expenses, not the reduction that many are likely hoping for, when they retire. Therefore, people’s financial wellbeing decreases significantly following retirement, if they don’t have any additional savings. We have calculated that someone who is around 35 years of age would have to save around 180 € per month (taking into consideration a conservative rate of return of 2%, which they are earning on the saved money), in order to maintain the same standard of living they enjoy with their current monthly net salary of 1,000 €.

Your savings allow you to achieve a measure of control over the important decisions in your life

If someone doesn’t have any savings, many of the most important decisions in their life (for example, changing jobs or returning to work from child care leave) are strongly affected by their monthly earnings. A high degree of dependency on earnings may mean that a person is forced to accept a job offer even if it doesn’t suit them, or to return to work immediately after child care leave support ends, even if the child is not yet ready for nursery school. If you have any financial assets, you are self-dependant, and are able to make independent decisions during turning points in your life without rushing.

How to save?

Step 1: Set specific objectives

If you would like to achieve a certain monetary goal, then write it down. The act of writing it down alone increases the likelihood that you will achieve it by 30%. A good goal is specific, quantifiable, achievable, important to you, and has a clearly defined timeframe.

First, we recommend setting aside a savings buffer for unforeseen expenditures, i.e. creating a Peace of Mind Fund (PMF). This will help you be prepared for extended periods of illness or greater expenditures (for example, a broken water pipe). You should be able to access PMF savings quickly. This means keeping extra money in a bank account or savings account, where it can be accessed within a few days, at most.

Begin saving money in your PMF by taking your options into consideration. We recommend setting a specific amount as your first savings goal (for example, 500 €), which you are also actually able to set aside over a period of 12 months. In this way your PMF will become the foundation for your savings.

In the long-term, the PMF could be a sum that enables you to cope with a period of six months without income – if, or course, you do not make any unnecessary expenditures. A six month PMF may seem like a very large amount and a goal that remains a long way off, but it is not one that you should be intimidated by. The most important thing is to begin saving today. If you have fulfilled your short-term objectives successfully, proceed at a reasonable pace towards your final goal.

Over the first 12 months you set aside a PMF that is sufficient to cover a period of two months, on the prerequisite that you are able to save 10% of your income and that the bare necessities comprise 70% of your income.

After meeting your initial savings goal for the 12 month period, set a fixed amount that you will continue to save each month – for example, 100 €. You could divide this sum between three funds. These are the already familiar PMF, a Large Purchase Fund (LPF) (in order to begin bringing your bigger monetary dreams to life) and a Good Life Fund (GLF) (in order to ensure good financial standing and independence in the distant future).

The most important thing is to follow the rules on the basis of which you are directing one third of your monthly savings to each fund. The exact proportion depends on your personal preferences. The division of savings allows you to achieve peace of mind and at the same time continue to move closer to fulfilling your dreams and ensuring your well-being in the future.

For example, you can set aside funds in the Large Purchases Fund (LPF) for a longer trip or purchasing a home. The duration of the LPF savings period is likely under five years, which means that it is not reasonable to invest the money in this fund. Keep the money in a bank account or a fixed-term deposit.

The Peace of Mind Fund (PMF) is intended for collecting long-term savings with the goal of growing your assets. Saved money can be used to ensure your well-being in the future – permitting bigger life changes or ensuring a more comfortable retirement. It is reasonable to invest money saved in the PMF in securities. By doing so, you will avoid a loss in purchasing power and also earn long-term additional revenue.

Step 2: List your main sources of revenue and expenditures

Prepare your budget simply and comprehensively. Your goal is to determine how much you are actually able to save. Therefore, look for expenditures that you can reduce or eliminate altogether. Also think about how to increase your revenue, in order to meet your savings goal.

The main categories where you can find places to save are eating out, entertainment, unnecessary purchases and expensive loans. If, for example, you have a loan on which you are paying more than 10% interest, it would make sense to repay the loan first, before you even begin saving. If you have already prepared a budget, you will know whether your savings goal is realistic. If this is not the case, go back to Step 1 and bring your goal into line with your actual budget. A sure way to fail when it comes to saving is to set unrealistic goals for yourself, since over time these may drain you of the desire to save anything at all.

In the case of a long-term loan, calculate whether its interest (for example, 3%) is lower than the expected return that could be generated with the long-term investment of the amount (for example, 7%). If the forecasted revenue from the investment is greater than the loan cost (i.e. interest paid), it is generally reasonable to invest your savings, not to repay the loan earlier. The prerequisite for this action is that your indebtedness is at a reasonable level (monthly loan payments comprise less than one-third of your income).

Step 3: Make savings convenient for yourself

If goals have been set and you have found sufficient money in your budget to meet your goals, it pays to make saving as easy as possible for yourself. To do so, create a separate account or accounts and make saving automatic.

As a basic rule, on payday always make the deposit to your savings account first, followed by the others. In this way you can be certain that you are making expenditures within the limits of your bank account. The best savings account is one which you don’t see all the time, since this will result in less temptation for you to use the money. Savings accounts can be named after goals, for example, PMF, LPF, and GLF accounts. Savings can be automated, for example, with a standing payment order, a set amount will automatically be deposited in your savings account on pay day.

Step 4: Reward yourself

In order to make the process of savings pleasant and exciting, select rewards which you will allow yourself once savings goals have been met. For example, you could celebrate reaching 50% of your PMF with a pleasant dinner at a restaurant.

Step 5: Try to increase the amount you are saving

Keep vigilant watch over whether you are meeting your goals and look for opportunities to gradually increase the amount that you save each month. If you have been able to successfully meet your savings goals over an extended period of time, weigh the potential for increasing your monthly goal and standing payment by 10%, for example. You can also use playful solutions, such as microinvesting, in the case of which small transfers are made to your Growth Account when you make card payments. With the help of microinvesting, people are able to save an average of 7 € each week.

If you are unable to fulfil the goals you have set, consider reducing them – in the end, the important thing is forming a savings habit. You will be most successful with this if you get a good feeling from saving, since you have reached the goals you set.

Why start investing?

It pays to begin growing long-term savings (Good Life Fund) through investments even if the sum is only a few dozen euros.


Regular price increase or inflation continuously reduces the purchasing power of money, which is why it is not wise to keep long-term savings in cash.

For example, 3% annual inflation will reduce the purchasing power of money by 26% over a period of 10 years. This means that the current 1,000 € will be worth only 740 € in 10 years. The goal of investing is to get your money growing, so that the profit from the investment would be at least equivalent to the rate of inflation, for example, 3%. By doing so, 10 years from now you will still be able to purchase the same amount of goods with the 1,000 € you have saved.

Long-term investing allows you to substantially grow your savings

For example, the world’s largest stock market, the US stock market (S&P 500 index), has grown by an average of 10% each year over the past 90 years. An annual rate of return such as this can drastically change the results of your saving.

If you save 1,200 € for 30 consecutive years and keep that sum in a bank account, you will have 36,000 €.

If you invest the same money each year with a rate of return of 10%, after 30 years you would have nearly 200,000 €, i.e. a sum that is six times greater.

How to invest?

Step 1: Start now

It pays to start investing as soon as possible. Time is the most important factor when it comes to investing, since the majority of investment return comes from the reinvestment of profit over a long period of time. This is referred to as the effect of compound interest. Compound interest means that the already earned return will begin to earn a return of its own.

For example, with a rate of return of 10% on 1,000 €, you will earn a profit of 100 € in the first year. Next year, at the same rate of return, you will earn a profit of 110 € on the investment that has now grown to 1,100 €. In this way you will earn a profit of 236 € on the investment that has grown to 2,358 € by the tenth year.

Time is the most important factor when it comes to investing, since the majority of investment return comes from the reinvestment of profit over a long period of time.

Result: if you begin investing at the age of 25, you will only need to invest 45 € each month, at an annual rate of return of 10%, in order to save 250,000 € by the time you reach 65 years of age. If you begin 10 years later, you will need to invest 120 € each month, two and a half times more, in order to save the same amount.

Step 2: Start with small amounts

It is often believed that large sums are required to make an investment, and therefore long time is required to build momentum in order to collect an amount that one believes is sufficient. This is not true!

For example, with the help of the LHV Growth Account, one can begin investing starting with one euro. At first it may be better to practice with smaller amounts, since it is inevitable that mistakes may occur, and small mistakes are better than big ones. In addition, small sums grow into big ones as a result of long-term and continuous investment. If you invest only 33 € per month in the Growth Account for a period of 25 consecutive years, and the rate of return is 10%, you will have 40,000 € by the end of that period.

Step 3: Put together an investment portfolio with suitable risk

A bigger risk means that the value of the asset may fluctuate more, but in the long-term you generally earn a higher rate of return. And vice versa: in the case of a lower level of risk, the value of the asset will fluctuate less, but the rate of return will generally be lower at the end of the period.

Broadly speaking, investments can be divided into two asset classes: high-risk, i.e. share investments and conservative, i.e. loan investments (bonds, crowdfunding etc.). The most common variant is to divide your investment portfolio between the two, using the following rules

For example, a 30 year old investor with an average appetite could divide their investments with 20% placed in loans and 80% in shares.

In Estonia, many people wish to own real estate as well as investments, which means that the portfolio could have a third asset class. Since physical real estate frequently means a concentrated risk (since one purchase likely comprises a significant portion of your portfolio), it pays to maintain the real estate investment part of your portfolio at a moderate level. For example, international professional investors generally keep 10–20% of their investments in real estate. If you have real estate investments, reduce the share of other asset classes in your portfolio accordingly.

Desired risk levelLoan percentage %Share percentage %
Low= your age= 100 - your age
Average= your age - 10= 110 - your age
High= your age - 20= 120 - your age

Step 4: The simplest thing is to begin investing in broad based funds

The process of selecting individual stocks in which to invest may seem very complicated to new investors. It is simpler to start with funds, which invest in a large number of shares simultaneously. A good example is the S&P 500 fund in the LHV Growth Account, which invests in the 500 largest publicly traded companies in the US. Instead of picking one company at a time this fund allows to invest in all 500 companies at the same time.

To invest in the fund, you could select a few general trends that you find acceptable. One of these, for example, is the trend, according to which the 500 largest companies in the United States – including Apple, Ford and Coca-Cola – will continue to grow their value in the future. It is easier to believe in the world’s largest companies increasing their combined value in the future than to know which of those companies will grow by precisely how much. In addition to more generic funds there are also theme funds which invest in real estate (for example, “Real Estate” fund in the LHV Growth Account) and loans (for example, bond funds in the LHV Growth Account)

Step 5: Invest constantly and, in the best case, automatically

It is notoriously difficult to find the most suitable moment to make an investment. Which is why we offer long-term investors the opportunity to begin today and invest under a set schedule, for example, making a monthly 100 € investment. If you are able to do so, make your investment automatic, for example, direct the amount via a standing order to your LHV Growth Account.

Continuous investing allows you to purchase securities at the average price for the period (averaging of the purchase price), which means you are not risking the investment of a large sum of money at an abnormally high price. Based on the schedule below, the illustrative link between the average acquisition price and the purchase frequency can be seen.

Purchase cost per shareProfit per share at the end of year
1. Buying at the end of year with 1,200 €1100
2. Buying twice a year with 600 €8624
3. Buying at the end of each quarter with 300 €8426
4. Buying each month with 100 €8426

In addition, the automation of investments allows one to avoid strong emotions (excessive fear or optimism), which are frequently experienced by investors and which generally have a negative impact on the return on investment. A common situation is one in which following a decline by the market an investor is gripped by fear and wishes to sell their securities at a low price. Looking at things rationally, he or she has the opportunity to purchase securities at a lower cost than prior to the decline of the market. Which is why in the long-term perspective the best decision in the case of a market decline is to continue buying – buy more shares for the same amount of money than was previously possible. By doing so you will lay the foundation for better profitability at a time when the market begins to rise again in the future.

Step 6: If you have any questions or are interested, visit us for a consultation or attend our “Investment School” seminars

At the LHV’s free seminars we talk about share analysis, asset classes and much more. Continuous learning allows you to find more insightful and better solutions for growing your assets.


  1. Begin investing immediately, if you have the least a bit of money to set aside over the long term (steps 1 and 2).
  2. Select an investment strategy with a suitable risk level and a broad based fund that is suitable for your strategy (step 3 and 4).
  3. Prepare a set schedule (ideally automated) for making investments (step 5).
  4. Save more and invest more, thereby ensuring your financial well-being in the future.