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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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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.