So, now we know that the “dear money” is neither good nor bad and that we may also accumulate 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: Be aware of the the extent of your lifestyle (monthly income vs. expenses) and the current hourly wage clear. We can refine this a bit by asking yourself the following questions:
- Unforeseen: How much money do I need to stay afloat in an emergency? To the extent that I can continue on the same level as before the emergency, as soon as I have been able to take care of it adequately?
- Planning: What short and medium-term goals do you have and which short- and medium-term acquisitions are you planning?
- Priorities: Which of them are necessary to achieve the long-term goal of financial freedom, so that the fun in between does not become too much come shortly?
We are also familiar with the first question from the very first article of this bog. The rule of thumb here is that we can need a nest egg that will keep us afloat for about six months, i.e. six 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 for them out of the postage. Roughly speaking, this applies to all purchases that exceed the current monthly lifestyle in terms of purchase price, to the extent that it takes more than a month to set aside the amount. 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 repairs get bigger, a few thousand euros can be gone quickly. 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.
In question three, these future planned purchases are divided into three categories: necessary things, luxury or frills. What do I definitely need soon? What do I want because it motivates me? What can I do without?
If these questions have been answered adequately and it is reasonably clear what amounts are due, then we can start to open a reserve deposit to finance these things. This is something like your own personal reinsurance. An insurance company steps in when an unexpected event occurs that was previously insured and pays for it. For this I pay contributions to the insurance company in the time before this event. The structure of these reserve depots follows the same scheme. I put some money back every month and deposit it into different accounts until they are sufficiently filled. If the case for which I have 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 unexpectedly breaks down. Sufficiently filled with: six times a month lifestyle.
- Saving: Purchases that cannot be paid for from the postage account in terms of their size. Sufficiently filled for: The total planned purchases for the next two to five years has been reached.
- Reserve: Reserve for emergencies (repairs, etc.). Sufficiently filled for: Total of the planned repairs for the next two to five years has been reached.
- Fun account: for motivating luxury, vacation, parties, fun etc. Sufficiently filled for: Total of planned expenses / vacation for the next twelve months has been reached.
It is of course up to you whether you want to do it the same way 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 and that the accounts are only looted for the purpose for which they were made.
Oh yes, and of course it is also important to get started in the first place. So it’s best to start writing down your personal accounts right now. It doesn’t have to be set in stone right away. If you haven’t done anything in this direction, then you are setting a new pattern in your life. That is also allowed to mature, e.g. over a few days or weeks, and over time be adapted to your own situation again and again. But you should take the first step now: take a few minutes, reflect on what you have just read and write down which reserve deposits and which accounts you need for your personal financial freedom.
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? How do I fit that into the accounts I just mentioned? The answer here: it depends. Debts also have a “return” that is “merely” negative for the debtor. The crucial question is: how big is the monthly interest burden?
In theory, mining is only worthwhile if there is no investment with a higher return that I could pay into at the same time. If I z. B. have a well-running share portfolio that yields 8-10% per year and at the same time a loan with only If you have to pay 5% annual interest, then it makes sense to delay the repayment of the loan as much as possible. Every euro that I have available to invest is better put into the depot. Why? Quite simply: if I use the euro to continue paying off the loan, after a year I will have saved five cents on the interest. If I put it in the depot and wait a year, I have to pay five cents more in loan interest, but get eight to ten cents return for this euro. I can keep the difference of three to five cents.
There are even people who make professional use of this concept. You incur 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 tens of thousands of times, especially when setting up 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 carefully, 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 accelerate a lot.
It is usually worthwhile to pay off consumer debts as quickly as possible. They usually 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 premium paid in percent. If this 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. With higher interest rates, pay off as quickly as possible, but also not so quickly that I can otherwise no longer build or replenish my reserve deposits or have no more money for investments
And of course I can’t overdo it overall. To come back to the crucial question mentioned above: I would like to be able to afford the loan as a whole and pay the monthly installments. So there has to be enough money in the till that I can pay him off cleanly. The installment payments will therefore become an integral part of the expenditure part of my lifestyle table, on best even with a separate section called “Lending Rates”. And it makes sense to plan a separate account for this, in which there is always as much money as I need to repay the installments. Ideally, one more idea so that the whole thing is not sewn too much on the edge. When these points are all considered, essentially nothing can go wrong. Then, in the best case scenario, such a loan ceases to be a burden and service begins to be fun.
Pulling Money Levers
So far so good. But what if I don’t have enough money to fill these great reserve deposits? What if I would like to, but can barely get by with my money and not really much left at the end of the month?
There are essentially two approaches here. Increase income or decrease expenses. Unfortunately, there is no other way. It’s the same as dieting when you want to lose weight. It only works sustainably if, in the long run, I eat less than I use or use more than I eat. Otherwise the body will not break down fat. Unfortunately, these are the limits that physics sets us here. And it’s exactly the same with money.
Well, once this pill has been swallowed, the next question arises: what is the best way to do it? Let me deal with both topics in turn.
About saving it can be said that most of this has already been done if you Exercise as a lifestyle. With the created table you have a great overview of your expenses and can easily decide where to start the red pencil. Start with the largest items and luxury expenses, then work your way through the categories systematically. I bet there are a few things that you can restrict yourself to. And the nice thing is, it doesn’t have to be forever.
And by the way: it can also be very exciting to go without something for a while. In my experience, you can enjoy certain things particularly well if you haven’t had them for a while. You don’t have to become a frugalists. I have met a few such people and I think most of them overdo it a little with saving and restricting. Too much quality of life would be lost for me. But there is one thing they can do: how to save. So if you think it will help you cut your expenses, a little Google research on frugalism won’t hurt. There are lots of creative and often useful tips in the scene on what you can do to limit yourself.
I find the second point a lot more exciting than saving, because it has a lot more potential and a lot in common with investing: increasing your income or your own hourly wage. There are about as many tactics and ways to do this as there are for saving and I could write a complete series of articles about it (if you are interested in something like that, you can contact my participate in feedback poll). So I just want to briefly mention the most important points here.
If I want more income, I have to create more value for others. That is arguably the most important rationale in the whole story. The biggest lever I can use is my own further training. The better I get at the field I work in, the better my performance and the more someone will be willing to pay me for it. Continuing education can happen in a variety of ways. Probably the cheapest is to see whether your own employer offers courses or training for additional qualifications. In the best case, something like this even works during working hours. Another possibility are evening courses at (elementary) colleges or distance universities or you can buy books on the topic and expand your knowledge on your own.
A second lever that should not be despised is the marketing of yourself. Here you should first get an overview. How much do I currently earn for my performance compared to others. And when I find that I am a little beaten here, then it is time to catch up with the others. E.g. through a raise in salary. It is important to note that what counts for the boss is not what you need but what you do for the company. When talking about a higher salary, many proceed in such a way that they think about what they need (more money for a new car or to feed the children or to be able to pay off the loan for the house). But the boss usually doesn’t care. What counts in a salary negotiation is the performance for the company. Where have I been able to add value to the store I work in recently? Or where can I do that in the near future? Are there inefficient processes somewhere that can be improved? Are there any promising projects that I can take on? These are sensible points that you can look out for in order to make it sound like the boss in the next employee interview that you are worth more than what is stated on the current pay slip.
In general, the more responsibility that can be assumed in the job, the more is paid. It is not for nothing that middle management salaries are often better than those of senior technicians. The manager typically runs an entire department of technicians, has to manage budgets, and is responsible for keeping his shop running. The technician or engineer has the specialist knowledge and implements it. I don’t want to diminish the performance of a technician by doing this, on the contrary. Nothing would work without the boys. But certainly not without the managers, even if the profession has, let’s say, a less than ideal reputation compared to a technician. But the fact is, when I work somewhere in development as an engineer, my salary potential is limited. A top manager has more chances and opportunities for more money.
So if I notice that I have reached a dead end in terms of wages, then there is always the option to change jobs. That can also be within the company. Maybe there is another department that is looking for someone or another location. Or maybe my current job is getting on my nerves so much anyway that I prefer to do a few training courses and then look around for something new. Of course, that doesn’t have to be all and I wish that you have already found your dream job in which you get up and earn enough. But I still want to list the possibility here because it exists and can be very promising. The important thing is: if you are in the tricky position that you have too much month left at the end of the money, that you choose at least one from the pool of options and get started with it. A short Google search often creates the first starting points where you can continue.
And if all else fails and there are no surpluses in the near future with which to fill up the reserve deposits, then there is always the alternative of starting with just a few euros or even without money. I can also make an investment on paper. Start learning once and then, later, when there is money to invest, pay less to learn.
This works particularly well when trading stocks. There are plenty of websites where you can create a free model portfolio and buy stocks or other securities with play money. Wikifolio is a nice example, because they only trade with real prices would also get on the real stock market. A great playground to gain experience, for me it has become one of my main pillars.
Cash flows – where to put the dough?
And we’re almost done with that. If you have managed to generate surpluses by increasing your hourly wages or reducing your 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 in the eye of the beholder. Everyone should be able to calculate that for themselves by now.
The brave 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 a, two, maybe even three decades before we can make a living from our investments. First reduce debts and then start investing 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.
All jokes aside. It is of course better to parallelize the reduction of debt and the accumulation of wealth. Suppose I start with 100,000 euros in debt and 100,000 euros in assets at the same time. Then the bottom line is that I have zero. But at least I have an amount that I can work with and grow. Because, as mentioned above, the difference between debt interest and investment return works for me if I’ve invested wisely. So this can be better than starting from scratch instead.
The following can finally be said about the investments: At the beginning I would deal with a single 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, set up and manage is manageable.
If you have not already done this, think about what major expenses you will have for the next few months and whether there are certain items that you reserve for want. Then create a scheme for the various accounts and plan the amounts for monthly cash flow and level of the accounts. If there are debts, consider the repayment speed (depending on the interest rate: pay off consumer debts and high interest rates quickly, low interest rates more slowly), if necessary with the Talk to the bank whether the loan agreement can be adapted to these ideas and plan a corresponding account.
If you’ve never done this before, you can use the scheme I described above as a guide. Don’t get hung up on the exact numbers. What is important here are the orders of magnitude (do I need a few hundred or a few thousand euros on this account?) and that you get started. Both the scheme and the amounts can be adjusted over time, once the first learning effects and a good gut feeling have set in. Getting started and doing it first is better than not getting into the push at all.
You then have a solid foundation for your own financial freedom. This is like the speedometer and distance sensors combined in a car. It keeps you on track financially and ensures that you don’t skid even when things get a little hotter financially. And then only one thing is missing: find your first investment and get started.
And if you are now wondering which investment might be suitable for you: here it goes on with the last article from the “Basics” series, which illuminates exactly this topic: