Financial literacy refers to the skills and knowledge necessary to manage and understand personal finances. It encompasses a range of essential skills and knowledge, including:

• Budgeting: The ability to prepare and adhere to a budget, including balancing income and expenses.
• Saving and investing: Knowledge of saving and investing principles, including an understanding of different savings and investment options and how to assess their associated risks and returns.
• Understanding credit cards and loans: Knowledge of responsible credit card use, understanding of loans and interest rates as well as debt management.
• Making financial decisions: Ability to make informed financial decisions based on personal goals, needs and financial resources.
• Financial literacy in everyday life: Understanding of taxes, insurance, pension planning and other financial services, along with their impact on everyday life.

Financial literacy is an essential skill that helps people achieve financial confidence and stability, enabling them to make informed and effective decisions in managing their finances.

You can find impartial information on how to manage your finances on the consumer information website of Finantsinspektsioon (Estonian Financial Supervision and Resolution Authority).

Pension literacy refers to an understanding of how the pension system works and how to use its opportunities to achieve adequate financial security in retirement. A solid understanding of the pension system will help you better plan your personal finances and determine how much you need to save, accumulate and/or invest to secure sufficient financial resources for retirement.

A pension-literate person understands how the pension pillars are interconnected, how having children and working in different professions affect pension amount and the time of retirement, how working under an employment contract, serving in the public sector or engaging in entrepreneurship affects the amount of the pension. Pension literacy also encompasses an understanding of how the tax system affects different pension pillars.

The earlier you start saving for retirement, the greater your pension assets will be. Estonia has three pension pillars, learn more about these options and make your choices.

A pension is a regular financial payment in the event of old age, incapacity for work or loss of a provider. The aim of the Estonian pension system is to help people maintain their current standard of living and monthly income upon retirement.

The Estonian pension system is structured around three pillars:

• I pillar: state old-age pension
• II pillar: mandatory funded pension
• III pillar: supplementary funded pension

The Estonian pension system allows for separate retirement from the different pillars. This means that, for example, retirement under the first pillar state pension does not automatically imply the withdrawal of the second or third pillar. Conversely, the withdrawal of the second or third pillar does not necessitate simultaneous retirement and receipt of the state pension. There are various options and conditions for accumulating and withdrawing pensions from the pillars. To receive a pension from the chosen pillar, the appropriate application must be submitted at the desired time.

The first pillar state pension is determined and applications are accepted by the Social Insurance Board. Second and third pillar applications can be submitted to the Estonian Pension Centre, which maintains the Estonian Funded Pension Registry, or to service providers such as banks, insurance undertakings or fund managers.

Financial literacy begins with creating a budget, which is a plan that helps you manage your finances and avoid excessive spending. Start by documenting your income and expenses every month, analysing where your money comes from and where it goes. You can use various apps or Excel spreadsheets to track your expenses. Break down your costs into key categories, such as housing, food and entertainment, to better understand your spending habits. This provides an overview of your finances and helps you analyse which expenses can be reduced or identify ways to increase your income.

Wise and conscious budgeting can help you achieve financial stability and independence while providing peace of mind and confidence for the future. To that end:

• Create an emergency fund: ensure you have at least three to six months’ worth of living expenses saved for unexpected situations. This will help you manage unexpected expenses without needing to take out a loan or use a credit card.
• Set financial goals: establish both short- and long-term financial goals, be it travelling, buying a home or saving for retirement. Setting goals will motivate you and provide a clear sense of direction.
• Automate your savings: set up automatic transfers to your savings account as soon as you receive your wages. This will help you avoid the temptation to spend money before saving.
• Review your budget regularly: your budget is not set in stone. Review it at least once a month to make necessary adjustments based on your changing circumstances and priorities.
• Reduce obligations: if you have high-interest loans, instalments or leases, a budget can help you identify ways to pay them off faster. High interest rates can lead to higher costs in the long term.
• Make a habit of assessing and analysing your spending: before making major purchases, carefully consider whether they are truly necessary and if they fit within your budget. Compare prices and look for special offers.
• Learn more about financial literacy: improving your financial management skills is an ongoing learning process. Read books, attend financial literacy training courses and follow experts to keep up to date with new opportunities and stay motivated.

Wise and conscious budgeting can help you achieve financial stability and independence while providing peace of mind and confidence for the future.

Saving is crucial for financial security. Start by establishing an emergency fund that covers at least three to six months’ living expenses. This will help you in the event of unexpected situations such as job loss or health problems. Automate your savings by setting up automatic transfers to your savings account right after payday to ensure consistent saving. If possible, choose a savings product that earns interest but remains accessible when needed.

Before taking out a loan, carefully consider whether you need it and can afford to pay it back. In addition, you should carefully read and fully understand all loan agreements and their terms and conditions. It is particularly important to be aware of not just the interest rates, but also any additional fees and the repayment schedule principles. Create a detailed plan for how and in what order you will start to repay your debts – this will help you stay focused and track your progress. If possible, prioritise paying off high-interest loans faster. Effective loan management is key to maintaining financial stability.

If your debt becomes overwhelming or you feel unable to manage it on your own, seek help from a debt counsellor. A debt counsellor can provide strategies and support to help you gradually get out of debt.

Investing means the long-term accumulation of money with the primary goal of generating additional income from the invested funds. Investments can be made in different asset classes, such as pension funds, securities (shares, investment fund shares, bonds, etc), real estate, raw materials, precious metals, art or even developing your own business.

The goal of investing is to grow your money faster than inflation, ensuring it retains its purchasing power over time. Inflation refers to the gradual decline in the purchasing power of money, meaning that €100 will buy you less in a year than today.

Investing is a marathon, not a sprint, so maintain a long-term perspective and avoid making emotional decisions. Begin with small investments to learn and gain experience. A great way to start investing is by taking advantage of the tax incentives offered by the state and investing in the second and third pension pillars.

Investment funds are built through saving!

The pension calculator provides an estimate of what your state pension would be if calculated today. The calculator is pre-filled with data available to the Social Insurance Board and the Estonian Pension Centre.

You can modify the data in the calculator and changing or adding information will adjust the estimated pension amount. Currently, the calculated total pension does not include the third pillar – it only displays the total value of the accrued amount. Additionally, the calculator may not have all the data on the voluntary or third pillar, for example, if the person has concluded a pension insurance contract with a life insurance undertaking.

The pension amounts displayed in the calculator are presented in current values.

The average retirement period is 18 years, but it can be even longer if you retire five years early. During retirement, the money in your pension fund continues to earn returns and compound interest. However, if you just keep the money withdrawn from the pillar in your account for 18 years or more, you will miss out on potential returns and be negatively affected by inflation.

The funded pension option is available for both II pillar and III pillar.

There is considerable flexibility and options when it comes to withdrawing accumulated pension funds from both pillars. Therefore, think carefully before deciding to withdraw all your accumulated pension money at once. You can withdraw the accumulated amount either as regular pension payments or as lump sums of varying sizes if larger amounts are needed.

Example

Scenario A:
I leave €10,000 invested in a fund with an annual return of 5%. After 10 years, the amount grows to approximately €16,289.
After accounting for estimated inflation (3% per year) and income tax applied upon withdrawal, the real value of the funds would be approximately €12,000.

Scenario B:
I withdraw the money as a lump sum. I immediately lose 20% to income tax. In addition, the purchasing power of money simply sitting in a deposit decreases due to 3% annual inflation — over 10 years, by approximately €2,000.
The real value of the money after 10 years would be approximately €6,000*.