So now we know that the “dear money” is neither good nor bad and that we can also amass it for private purposes. But how do you make it so sustainable that you can not only keep it but also multiply it and at some point no longer have to worry about it full-time?
Reserve custody accounts – personal reinsurance
We have already learned the first step: Find out about the scope of your lifestyle (monthly income vs. expenditure) and the current hourly wage. We can refine this a bit by asking yourself the following questions:
- How much money do I need to stay afloat in emergencies so that I can continue at the same level as before as soon as I have been able to deal with this emergency adequately?
- What short- and medium-term goals do you have and which short- and Are you planning medium-term acquisitions?
- Which of them are necessary to achieve the long-term goal of financial freedom, so that fun in between is not neglected at the same time?
We already know the first question from Chapter 2. The rule of thumb here is that we can need a nest egg that will keep us afloat for about 6 months, i.e. 6 times our current monthly lifestyle.
The second question is about things that we want to buy in the near future, but which are so expensive that we cannot pay them out of the postage account. Roughly speaking, this applies to all purchases that exceed the current monthly lifestyle in terms of purchase price, to the extent that you need more than a month to set aside. That could be a new washing machine or a new car, but also a new computer that I need to work or something similar.
Not only new purchases should be taken into account here, but also other larger expenses that may become necessary in the next few months or years. Homeowners may be familiar with this. Suddenly the gutter leaks and a craftsman has to come here. If the repair is bigger, a few thousand euros can be lost. Or the car has to go to the inspection or to the TÜV and the exhaust has to be replaced. For things like that, it is good to have a small financial cushion that you can fall back on if the worst comes to the worst.
The classification of these future planned purchases into necessary or luxury / frills happens in question three. What do I absolutely need in the near future? What do I want because it motivates me? What can I do without?
When these questions have been answered adequately and it is reasonably clear what amounts are to be expected here, then we can start to define a reserve deposit to finance these things. This is something like your own personal reinsurance. Insurance takes over when an unexpected event occurs that was previously insured and pays for it. For this I pay premiums to this insurance in the time before. The structure of these reserve depots follows the same scheme. I put some money back every month and deposit it in different accounts until they are sufficiently filled. If the case for which I created the account occurs, I use it and then start filling it up again.
I personally use the following four accounts for my reserve:
- Survival: for emergencies and to keep my head above water if the income suddenly falls away. Sufficiently filled with: 6x monthly lifestyle.
- Saving: Purchases that cannot be paid for in the postage account in terms of size.
- Sufficiently filled when: total of the planned purchases for the next 2-5 years has been reached Reserve: reserve for emergencies (repairs, etc.).
- Sufficiently filled for: total of the planned repairs for the next 2-5 years has been reached Fun account: for motivating luxury, vacation, parties, fun, etc. Sufficiently filled for: total of the planned expenses / vacation for the next 12 months has been reached
It is of course up to you whether you want to do the same and everyone will have their own “sufficiently filled” amounts with which they feel comfortable. The only important thing is that there is a certain discipline here and the accounts are only looted for the purpose for which they were made.
What about debt?
But what do I do if I still have any debts to pay off? Should i do that right now? Or delay as much as possible? The answer here: it depends. Debts also have a “return” that is “only” negative for the debtor. The crucial question here is: how big is the monthly interest burden? Theoretically, mining is only worthwhile if there is no investment with a higher return that I could pay into at the same time. [Example!] There are even people who run up debts at the lowest possible interest rates and use the money to earn a lot more elsewhere. To be precise, this is one of the oldest concepts used by entrepreneurs. They call it investing. This has proven itself thousands of times over, especially when building a company. Many entrepreneurs with ingenious business ideas want or can only start money with other people. But be careful: just as many thousands of times people have gone bankrupt because they misjudged or overdone with this strategy. The higher the mountain of debt, the higher the risk of not being able to pay your interest and repayment burden in the event of unforeseen events. This is the classic risk / return ratio, which everyone should determine individually for themselves. If you are toying with the idea of going into debt on purpose, you should think twice about it, know what you are doing and keep an eye on your own account balances and cash flows. So buckle up. And if you feel safe in the driver’s seat, you can use it to give a lot more gas.
To get back to the real question: it is usually worth paying off consumer debts as quickly as possible. They mostly have the highest interest rates. These are z. B. items on the credit card, an overdraft facility or installment payments for purchases of electrical goods. Ideally, the latter should not be entered into at all, but should be covered by the reserve depots mentioned above. That is sustainably cheaper. With these super-cheap offered zero percent financing, I like to first add up all the monthly installments and compare them with the purchase price for immediate payment. The difference divided by the purchase price times 100 gives the surcharge actually paid in percent. If it is actually close to 0, there is nothing to prevent you from stretching your own liquidity a little – provided the time it takes to fill out the loan agreements is reasonable. Such paperwork isn’t exactly one of the things I enjoy doing.
I would pay off all other debts from student loan repayments to legacy issues from legal proceedings to home loans, depending on the yield. Rule of thumb: With an interest rate of less than 2-4% as slowly as possible, because I can invest the money more profitably elsewhere and the difference between the interest on the debt and the return on the investment works for me. If interest rates are higher, pay off as quickly as possible, but not so quickly that I can otherwise no longer build up or top up my reserve deposits or have no more money left for investments.
Cash flows – where to put the dough?
And we’re almost done with that. So if it has been possible to generate surpluses by increasing the hourly wage or reducing the lifestyle, then these surpluses should go into asset accumulation as soon as the above-mentioned debts are sufficiently reduced and the reserve deposits are sufficiently filled. What “sufficient” means is always in the eye of the beholder. Everyone should be able to calculate that for themselves by now.
The brave ones start investing earlier so that the whole thing results in a nice flow. It also makes it easier to build up knowledge and motivation can increase. If I first have to “work” for 20 years until I have paid off the last cent of my real estate loan and only then start investing, it can be quite demotivating. We have learned that it can take 20-30 years before we can make a living from our investments. First reduce debts and then start investing so quickly adds up to 40-50 years in total. And if you start in your mid-30s, you will be finished with around 80 at some point. After all, the offspring will be happy about a rich fortune – provided they have learned to look after and keep it. Joking aside. It is of course better to parallelize the reduction of debt and the accumulation of wealth. If I start with 100,000 euros in debt and 100,000 euros in assets at the same time, the bottom line is zero. But at least I have an amount that I can work with and grow. Because as mentioned above, the difference between the debt interest and the investment return usually works for me. So that’s better than starting from scratch instead.
Finally, the following can be said about the investments: At the beginning I would deal with a main investment until I have built up enough knowledge and security in the area that it runs more or less automatically. As soon as that is the case, you should concentrate on a second investment that is independent of the first and can then be built up in parallel. E.g. a property to rent as a supplement to a share portfolio. This spreads the risk and if one system is currently in a crisis, the other continues to generate steady returns. Two main pillars are good, three are better. Four or more are great. Of course, the latter only makes sense if the additional time required to familiarize yourself with, learn, build and manage is manageable.