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Financial Planning

Lessons from actual monthly budgets in Germany

Budgeting!

This November, the Reddit Finanzen group had an explosion of budget threads. Many users shared then own actual monthly budgets in Germany and then there were shitposts… As Budgeting is an important step towards financial independence, it just made sense to write this post.

Even since I moved to Germany from India, I have noticed that Money is not a topic which seems to be actively and openly discussed. This was a great opportunity to see how people spend and save, and learn from them. Of course, survivorship bias exists on these posts, where people struggling with budgets do not share their stories (and I respect that).

I have handpicked three posts with very different life stages and circumstances. There are many more on the sub-reddit.

A 26 year old data scientist in NRW

26 year old Data Scientist, with a saving rate of 14.5%
  • The actual in hand pay for this person is 2400 EUR/month (Abzuege means payments to pension system, taxes etc…)
  • He has a decent saving rate of 14.5% each month, but is not investing at all.
  • Things at odd is that he is paying as much as his rent (550 EUR) on living expenses (including Hello Fresh). He explains this by sharing that he doesn’t like to cook a lot. I guess this is where he could optimize.
  • He is also paying for insurance for his girlfriend, which is a noble thing to do.

A double income, single child family in Bavaria

24.5% savings rate with a house paid off!
  • Love the amount of detail on this chart, but I find it also hard to navigate.
  • So the poster is a 50 year old with a wife and child, and is an engineering manager in Munich.
  • The total household income per month (without kindergeld/child money) is 6058 EURs. This is an amazing monthly income to have, and this includes around 427 EURs of passive income!
  • Their savings rate is 24.5% (1408 EURs). He also invests over 1k EURs in private pension plans and ETF.
  • The child is probably a teenager as there is a car insurance (PKV) for him.(wrong here, PKV is private health insurance)
  • They have a fully paid off apartment, and this is fantastic, because most people in Germany don’t own a home!

Unemployed Scientist and his Medicine student wife in their late 20s

Unemployed and yet saving 26%
  • This is by far my favorite post, this completely breaks the idea that you cannot save when unemployed! Of course, unemployment insurance is helping the Scientist
  • Their monthly income after taxes is 1736 EUR/month and yet they are investing 450 EUR/month (26% savings rate!! towards financial independence).
  • They do not own a car(car sharing) and live like students.

GetFI Takeaways from these monthly budgets in Germany

  • Savings and investing is possible at every income level!*
  • Your house rental or credit is a massive factor in better savings rate. All examples had fairly low rentals or a paid off house. I find it very difficult to find a house at those rents in my town.
  • The lack of credit card debt is obvious and good!
  • The stereotype that Germans are cautious with savings instruments seems to hold, many saved a lot but invest very little.

*I believe this to hold true only when housing costs stay <40% of your take home income.

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Rant

Side Hustles are hard!

Get yourself passive income, add to your monthly income stream to reach FI fast, I am doing it, and so can you.” Did you ever notice that far too many blogs and Youtube channels have these list articles, and explain how easy it is to side hustle. A typical post picks some Side Hustle statistics like the one below to prove how its way more common than you think, and how you are missing out.

The Millennials are at it again…usual suspects

Not convinced? Look at my recent Youtube search, the results were seemingly infinite!!!

The reality is, most of these hustles require way more effort and time, and do not guarantee a steady or any return. Sometimes, the ones telling you about the hustles are pushing their own ebooks or courses instead.

…..but Side Hustles work, don’t they?

Well, some of them do. The fact is, that only some side hustles or nebenjobs are quick to start with (Uber driving or food delivery) with no initial investment.

Most Youtube channels or blogs fail to indicate how hard it can be to start off on most side hustles, often they are touting their own storefronts, blogs, ebooks or online courses. Their platforms are for their own marketing. The lead time, the effort and uncertainty is often hidden.

No association with this guy, but he kind of covers every side hustle ever!

If it were all so easy, wouldn’t everyone be doing it?

….I think I can still my side hustle work

Great, if you have an idea or time to work on a side hustle you are confident with, then please go ahead and do it. I do not want this post to sound that this does not make sense and you shouldn’t try. All I wish to say is that be aware of the potential failure and hard work needed. Finally, be aware if it is a long term thing or a short term gig.

…so what does actually work?

If I knew, I’d be doing it :-D.

I think skill based side hustles really make sense, if you can coach a sport, or help kids with homework, or teach baking. Skills which are real, and local are the ones which I’d opt for.

Finally, first try to maximize your skills and income at your job, this will have a compounding benefit as you grow more.

…what is Mr A’s side hustle?

I don’t have one. I do get those ideas, but my daily work and family life keeps me occupied. A side hustle has a cost of time on it, and right now I am not willing to sacrifice my family time chasing a side dream. I am yet to have an idea which I feel can be long term sustainable for me.

I am yet to have an idea which I feel can be long term sustainable for me. Also, I do not regard this blog as a side hustle, I do have ads and some affiliate book links, but I’d be surprised if I can recover hosting costs from it (also not our goal)

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Post

Is debt bad for Financial Independence?

Here’s a confession, I do like to watch Dave Ramsey on Youtube, his take no prisoners approach is quite entertaining. Yet, he often is condescending, which seems unnecessary at times. After-all, people are calling him for his support and reaching out is always a good positive step.

Debt is Bad, without explaining why

Dave Ramsey is also often considered as a strong proponent of debt bad movement. This is not bad advice at all, yet, is debt really bad for your goal of financial independence? However, instead of simply listening to the gospel, can we really assess this?

The purpose of taking loans

The first step is to understand, why is there a need to take debt? It is simply to finance a good or service which you otherwise cannot afford through your regular income and savings. You are borrowing against the promise of your future income.

Digging into my debt collection experience in finance industry

Around a decade ago, I was working in the finance industry in India. I had a few takeaways:

  • We had customers owning Ferraris on loan, with ridiculus payments, which they failed to pay off. In the eyes of their social circle, they were considered very rich.
  • Many customers financed their commercial vehicles to earn money by transporting goods, without learning the costs of the business.

Both of the above examples are the real issue here.

#1 : Debt is bad when you take too much of it

While banks might only look at your credit score or income statements, they cannot predict if you will be able to sustain your debt. Can your choice to buy a ferrari cripple rest of your finances?

If your debt repayment will make it impossible to save anymore each month, then you are buying more than you should. Pare down on your wants, and evaluate if you can opt for a more cost effective solution.

Great loan offers give us an illusion that our spending capacity is more than what it actually is. This often means, we are willing to consider buying things which we should ideally be out of our consideration.

#2 : Don’t call debt bad when your math is bad

The whole idea of debt as a financial product is to earn money through interest rates. This is the return the banks will get after you are done repaying your loans. Thus a simple comparison between two debt offers is comparing their interest rates (and reading the small print).

Comparison of interest rates may not be the whole picture, you should consider the total cost of ownership as well.

For example; if you are buying a car, you will end up having monthly car payments, fuel, parking, maintenance, winter tyres and insurance costs. Add it all up, and split into monthly payments. This number should be affordable, else you need a cheaper car or delay the purchase.

The same applies to buying houses, or rental properties and even buying a TV on loan (monthly payments + electricity + cable costs).

What is the downside of too much debt?

Lets stick to the math of taking debt, and avoid a discussion on mental stress. Let me share a real life example of a friend, he bought an apartment in India with a 25 year mortgage. His monthly payments translate to around 1000 EURs (converting from Indian rupees) at an interest rate of 10%.

As a single income household, he finds it really hard to save after his monthly expenses. His only means of saving are the mandatory rentenversicherung payments. His mistake was borrowing against future earnings of two adults instead of one.

In hindsight, a smaller cheaper apartment would have made sense.

What is an acceptable debt?

Acceptable debt is a combination of sufficient equity (downpayment), manageable interest rate and viable payments.

Household debt in Germany

In the current context of Germany, I would rank the below debts and my preference:

Type of DebtGetFI RatingWhy
Personal CreditAvoid Avoid due to high interest rates, unless you use it to pay off a loan of even higher rate.
Mortgage (Baufinanzierung)OkHistorically low interest rates (<2.5%), try to start with atleast 20% downpayment (more the better)
Credit CardAvoidUnless you can stick to paying off the whole credit each month, just avoid.
Currently interest rates range 13%-19% per year!
Payday loans (minikredit)RunIf you need to consider this, you are in trouble
Auto LoansOkI suggest a high downpayment, dont buy a car you cannot afford.
Make sure interest rates<4% and contract upto 48 months.

The debt principles

Lets summarize our tips for acceptable debt (I won’t call it good debt):

  • When financing a property, use a broker like https://www.loanlink.de/ to get best rates from banks specially when you are not comfortable with German. (I have not used their services, they are an example)
  • When buying a property, go 20% or higher in downpayment, else reconsider your decision.
  • Avoid new cars for loss of value, buy in cash.
  • If you still need a car loan then limit runtime to 4 years and interest<4%. Try not to finance more than 50% of the value of the car.
  • Do your math, for apartments add costs of commission, registration, maintenance. For cars, running costs, parking and maintenance. These will give you an idea of your monthly expenses.
  • Always check loan prepayments options before signing on. The goal should be to have the opportunity to prepay loans without a penalty fees.
  • In case of prepaying debts, hit the one with highest interest rate first.

In short, be responsible with your choices, do not take undue risk. Too much risk can make you poor.

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Personal Post

Achtung! We can still fail to achieve Financial Independence

Achtung! Drop ahead.

Let me state out this in the first sentence, “I am not an expert on this topic, I am fiddling around and will help you figure what I already know. I am not even 7% of my FI Target and I can still fail to achieve financial independence”

But, I am confident that I will do better than what I was doing earlier (which was nothing), I might be slow or fast but I will get there eventually!

…but if we fail to achieve financial independence, we are screwed!

No, of course there are pitfalls on your journey to attempt to get to financial independence, let us not make it sound easier than it is. That side hustle may not work out, your pay rise may not happen, sickness can happen, repairs, car breakdown, bad investments and so on. There are a million unknowns which may or may not happen, and we cannot control them.

The only thing we can control is, our reaction to them, and still keep moving forward. So here are some postulates we can work with!

  • Some saving is better than no saving, it can be 50 EURs instead of 250 EURs you had assumed. It still counts.
  • Markets, be it housing or financial, will crash and rise. This is not in our control, but what is in our control is to invest for the long term.
  • Health beats any hustle or job, eventually ignoring your health will cost you the very same money you made by ignoring it.
  • Missing goals and targets in short term is normal. Don’t sweat it, bad days or weeks or months are natural!
  • Inspite of all the money talk here, money is still not the most important thing in life. So, live a little!

So, all I am trying to say is, start now and work towards this hard but worthwhile goal. We might be slow, or not achieve 100% of the target, but we will not even up in mud. Unless you make really serious mistakes, you will not end up broke.

Besides do you even have a choice?

When your rentenversicherung(pension) will get you less than 1k EURs after working for 35 years, and your retirement date will continue to climb up to almost 70, how will you survive? Old age poverty is as real as it can be.

Our current social security system is not sustainable and will be either barebones or collapse completely by the time we age, and we need to find a way to supplement the gaps in our income at that age.

Old Age Poverty in Germany

So, as I said it before and will repeat, it is all worth the effort.

Categories
Financial Planning Rant Real Estate

The debate around Rent control and Rental yields

Twitter, last week, was filled with a trending topic of #eigentumswohnung. The real culprit behind this massive outrage with an article on Rent control in Berlin, titled Ganz schön unsolidarisch.

The writer has ruffled some feathers, talking about people who bought apartments and with rent control, their yields will collapse. Germany, is a rental country, and very few individuals purchase houses. This opinion peace has received a backlash as rent control will be applied for next 5 years in Berlin. The issue in Berlin is a little serious as rental prices have gone up significantly in the last 5-6 years and risk gentrification. Sadly, all of this sudden hate resulted in the writer quitting twitter!

Now, am no expert on this topic, but a few months ago I did listen to Freakonomics Radio and an excellent discussion happened on this very topic, the website covers the most of it. Housing in Germany is a different animal, house supply is also tightly controlled and coupled with ultra low interest rates the prices are inflated. In fact Munich seems to be have been called out for this.

Suche Wohnung - Searching for an apartment
Suche Wohnung – Searching for an apartment

If you are trying to search for a rental apartment in Germany in a big city, you are probably competing against 60-70 other applicants at any given time!

At the time of this writing my portfolio has a cash component of 53% cash, largely because we are trying to save for a car and an apartment. The biggest challenge I face today is that our speed of saving is slower than the real estate price increase in our city.

For us, buying a home for self use is our primary goal, but we know that this will pin us down to a place. While I do not know what the future holds, but surely capping is not the right solution here. The demand for housing, social housing and approval of such plans has lagged all across Germany in the big cities. The fact is, people are moving to bigger cities, and rental control does not fix the lack of supply.

Sure, the rental yields will be lower, but at the current house prices, they are already insignificant. Getting a rental yield of 4% on an apartment of 400k EUR is just not possible, it may not be a great investment and might just get added to list of money mistakes.

Categories
Post Progress Report Series

Savings Update – October 2019

money jar
Another Money Jar!

Its that time of the month again, when we share our savings update! Last month we posted a savings rate of 45.7%, but as I had mentioned our savings rate is not as high in most months.

Our savings update for our individual savings this month were:

EarnerSavings Rate
Mr A21.1%
Mrs A46%

Our combined savings rate after combining our incomes is

28.7%

So, what went different this time and what is new?

Forced discomfort of upfront savings

My usual approach to savings has been to save a portion at the beginning of the month and then later towards to end of it. I felt that maybe I can push myself more and be upfront in savings.

This time I wanted to try to saving a 1000 EUR, and I transferred this to my savings only account within a week of getting the salary. It seems to have been okay, but a little uncomfortable in spending.

I will continue this for at-least 2 more months and check back if it is really makes me save better.

Higher than usual expenses in September and October

September is also the month when my toddler and I have our birthdays, we did spend some on celebrating and buying gifts. We did optimize on celebrating my toddlers birthday at home instead of booking a place like earlier.

Additionally, we had two Indian festivals this period and spent more on gift giving. This will continue for the next month as well, but then it will taper off and is expected at this time of the year.

Our Big Failure of the month

With all the extra new spend we delayed our remittance to folks back home. While there is no urgency to it, delaying it was not ideal and I need to fix this.

Outlook for the next savings update?

The outlook looks fine, we hope to go back up in the 30s next month as we expect our expenses to stabilize. I do foresee a repair expense of around 150+ EURs in the next week but that is unavoidable. I also expect some work expenses being paid out to top things off.

PS: October 31 is World Savings Day!

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Financial Planning Index Funds and Stocks Post

What is a Sparplan? What is Mr A really doing with his Sparplan?

Sparplan (I am so tempted to add a meme on this is SPARtaa..) is the way out of automatically managing your investments each month. It is an equivalent of a SIP (Systematic Investment Plan) if you are an Indian investor.

….when I login to my bank account, I notice two options, geldsparplan and wertpapiersparplan. What is the difference?

I use comdirect, and they have these two options, the main difference is:

  • gelpapiersparplan – This savings plan simply takes money from your account and deposits into a Tagesgeld account which earns a whopping 0.01% interest (as of this morning) p.a. In other words, not worth it.
  • wertpapiersparplan – This savings plan is the one we need, we can setup a monthly investment amount and usually declare ETFs or even stocks to invest in each month.

….how much do I invest in a sparplan? How much does Mr A invest each month?

As of this morning, I am investing 1098 EUR into my sparplan each month. This is mostly focused on diversified ETFs and 1 piece of Amazon stock. I will write more about this in Portfolio page soon.

What is more interesting to share is, that I was investing less than 300 EUR/month an year ago and less than 200 EUR/month 18 months ago.

As I have mentioned before and might do so again, we have to start with small steps and get comfortable. It took me a while to get comfortable with the idea of investing, and I started really slowly. I had never invested in Germany and had been programmed to be more cautious.

Can’t guarantee the numbers, but you catch the drift!

If you can start with even 25 EURs/month and grow from there.

….what do I invest in? What are the pitfalls?

Picking your investments is a massive undertaking, but has been extensively covered in reddit.com/r/finanzen or on frugalisten.de forums.

The key pitfalls are, all investments carry risk, transaction costs charged by your depot account per transaction and TER (annual expenses) must be considered very carefully.

….but can I not simply buy ETFs each month on the go and not bother with a sparplan?

Yes, of course you can, or you can schedule it and forget about it.

It makes it easier for me to plan it and worry about one less then thing to do each month.

If you have more questions on sparplan, then write into the comments section.

Categories
Financial Planning Personal Post

Financial Independence is worthwhile for me, you and everybody. Period.

Have you come across internet posts which label the FIRE movement as a cult, or how meaningless life will be if you retire at 40, or how FIRE is all about those people who hate their jobs? My answer to them all is Nein, Nein Nein! Financial Independence (sans retirement) is a worthwhile pursuit meant for all of us.

Job Losses are a reality

Job losses are real, and a reality of business cycles

Bayer to cut 4,500 jobs in Germany

Ford to cut 5,000 jobs in Germany in savings drive

Bank Job Cuts Approach 60,000 as Commerzbank Plans to Swing Ax

Thomas Cook is no more – What happens to its 21000 staff

The above headlines are from 2019, and we are yet to announce a recession. All those big companies are shedding, and I can bet that most of the employees there are really good smart people, and have families to take care of, yet they face a massive challenge in the months to come.

Sure, the German unemployment insurance will cover 60% of their pay for upto 2 years. Will they find good jobs soon, with similar pay and satisfaction? How many will end up being long term unemployed?

Finally, what if you or I were among those people, with obligations to take care of. Wouldn’t having an active effort towards Financial Independence make it easier? You may start with a small rainy day fund, but aim for a long winter, every little step will count.

Let us drop the myth that you are only Financial Independent if you do not need a job anymore, you can be Financially Independent for shorter period of time as well.

..but I do not want to Retire Early…

Exactly, Retiring Early is optional, not even an important factor here. Sadly blogs and popular media obsess over RE more than they talk of FI. All steps taken for goals, investments are really oriented towards being FI.

JL Collins wrote an amazing book called the Simple Path to wealth, he talks about how being Financial prudent allowed him to survive multiple job losses.

..but to be Financially Independent, I need to be frugal, its hard…

Image rights : Pat Bagly

Balance, and disciple is necessary for any worthwhile pursuit in life. You can either do a crash diet to lose weight, fail and gain all of it back again, or make quality food choice which you can continue over long term and reap health benefits.

What I mean is, its still okay to have a coffee from a cafe sometimes or continue your Netflix subscription if that feels essential to you. Guilt tripping oneself for every spend is not the way to do it, but tracking or planning reasonable purchases is. (PS: You define what is reasonable)

However, If your balance is in spending everything, then you need to re-assess your priorities. The decision to pursue Financial Independence is also your own life decision, nobody can force you into this, you are the hero/heroine of your life.

..but Financial Independence is worthwhile for people with above average incomes, and I can barely get by

If you had been lucky to have enough in the past and this is a temporary blimp then attempts at Financial Independence would have helped.

In contrast, if you never got a chance to even start saving and have been struggling for a long while, then you need to seek help, it can be help to find a new job, or upgrade skills or even more. I can only suggest that you need to hang in there tight, and keep going.

Categories
Post Progress Report

Savings Update – Sep 2019

Time for our first savings update, we had been trying to be more efficient for a few months now but it was to complicated too calculate for many reasons. As a result, its only in September that we are able to properly do it. One important rider, we weren’t super frugal, we still ate our and rented car for trips.

Money Jar
Not our money jar

We both have different payout dates, so I am trying to align our incomes in the same pay period and share the final percentages.

EarnerSavings Rate
Mr A35.1%
Mrs A 77%

As both are incomes are different and Mrs A is part-time at the moment, and thus when we do an actual calculation, we get to the below:

45.1 %

The month was an exception and I think our savings rate will average between 30-33% for an year.

So hang on for the next savings update. Next time I’d also share successes and mistakes of that month.

In other news, Germany’s Household Saving rate is 10.8% in 2019, which is a big ass number!

How much are you able to save now? What is your monthly goal?

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My Money Mistakes Personal Post Series

My Money Mistakes – 2019 edition

While we are on the topic of my relationship with money, I would kick start the series of My Money Mistakes and make it an annual edition. The year is yet to close, but I think I have already done the worst ones.

Our Goa trip; can’t remember the taste anymore..

Each year I make stupid money mistakes, which I mentally tag into my stupid mistakes bucket. Small bad purchases or misses which result in this are allocated, and try not to beat myself over them. My Money Mistakes is not about those accidental events, but of seemingly deliberate stupid decisions I have made, and will make with money.

This year, I have two really good candidates,

  • Trip to India, to attend a destination wedding and never getting to meet my own immediate family. We planned months ahead, got tickets for the three of us, survived 13 hours of flights (and a bomb scare at the airport) with a toddler to attend a wedding and meet old friends for 10 days. We did take a few days off after the wedding to stay in a resort and enjoy Goa (look it up, nice place). Yet, if I add up the tickets+gifts+wedding wear+hassle we had to go through, the trip was just not worth it.

    Apart from a damage of over 3000 euros, we got sucked into showing off our well being (the indian way). We did enjoy meeting some family members and friends, but this could have been done differently at another time. Never again.
  • Investing in Cannabis stocks. You can already see where this is going, I bought into CGC and AC stocks, both of them tanked horribly. I had a stop loss and luckily only experimented with 300 bucks, but even with that a loss of 21% in value hurts. Clearly I was high without learning the specifics. Will-not-repeat.
    (Side Note: On the other had I sold off Shopify which I never trusted and still made a profit, it is still going upwards but I don’t buy it.)

Would you like to share a mistake you made with money in the past year? Maybe we learn from it