I have a confession to make in this post. In the months of November and December, I failed to reach savings goals. I saved nothing in November and saved half of what I wanted to in December. Es ist mein schuld! It is my fault (schuld is also used as the German word for debt!) and am now trying to cope with lack of discipline while chasing Financial Independence.
Did Black Friday made me fail to reach savings goals?
The truth here is a combination of gift giving and planning for future travel. In the past 30 days I spent money on gifts for our anniversary, my wife’s birthday, a dinner on that birthday and gifts for a friend who just got married. You see a pattern here?
How did I get there?
My failing to save in November was quite disappointing, and I had resolved to make amends in December.
Come December, I fell off the wagon, I avoided reading any FI content to hide behind my shame. Today, I finally felt brave enough to look myself in the mirror and forgave myself.
I have little regret for spending money on people I cared about, and was conscious to not go overboard. What I did fail at was not being able to plan these expenses.
and survival checklist?
Ah yes, the Dave Ramsey approach is to eat rice and beans! My checklist to survive when you fail to reach saving goals:
Is this a symptom of a bigger issue? Am I not able to control myself here? No
Is this temporary or a permanent expenses which I cannot handle? No
Were my savings goals too big that they simply put me off and I felt I won’t get there anyway? Maybe
So, I aimed to save more than 1k EUR per month, and the goal was far too high to achieve. Like my dieting attempts, the high goal simply made progress impossible. In the tight months I could have lowered the targets and survived the frustration.
My survival tip to manage goals is to attempt Incremental changes, small steps lead to big results, else your old habits are hard to break. In fact in a way I just ignored my own advice.
I also suggest this beautiful Everyday App, which makes it super easy to track changes.
I have not been a keen imitator is template dreams, I still do not own a car, and have argued against buying an apartment at home. However, recent changes in the local European interest rates, changes in life situation and simply higher rents made me start believing that we could own a home. However, recent events have just made us decide that we have to delay buying our home.
For Sale
Why buy when you could have rented Mr A?
True. We tried and are failing.
After becoming a parent, the limitations of the space in our current rented apartment and the struggle of our visiting parents climbing 3 flights of stairs made us search for a bigger rented apartment.
Yet, with the constant struggle of applying and never being called to visit, and the few instances when we did get to visit homes, we are facing an uphill challenge where a bare increase of 10 sq.m area is going to cost us 40% more in rent. Rents have simply skyrocketed in the last 3 years. Additionally, we cannot simply move too far as we are bound by constraints of the daycare (already 7 km away). Thus the brilliant idea of buying an apartment was born, and we started to save for it.
You have to delay buying a home, because you do not have the money, isn’t it?
True again. Isn’t that always the case? I had been keeping an eye on a new development which was in a perfect location, and closer to the day care and yet not so far from the town center. An year of more purposeful saving made us come close to around 12% of the house value we had planned for (based on prices in the same area 18 months ago).
The price list came through on Monday, and it simply crashed through our plan. The prices of the apartments have risen higher than we had estimated, and our down-payment is lower than we wanted. I know I can probably get the apartment at 90% mortgage. I am tempted to try this, the apartment seemed perfect and had parks and no drive zone for children. But paying more than 35% of our monthly income for 30 years and extra maintenance money on top is not a financially wise decision.This is not how we Get FI! I do not want to write this purchase to be the title of my next Money Mistake post!
My wife and I had a long discussion this morning, and she just said,’We cannot take a 30 year mortgage which eats 40% of our income, this is stupid given that our child will be out of his daycare in 2.5 years‘.
She is right.
Delay buying a home. Hurts.
So, we have now reassessed our dreams and take a step back. We will save more next year, and are looking at places within our budget. Hopefully it might work out in 2020. I know I really liked that place, but I also like Maseratis…
In the end, our homes are our safe spaces, and it is our loved ones which make them a home else they are just brick and cement.
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.
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.
In the current context of Germany, I would rank the below debts and my preference:
Type of Debt
GetFI Rating
Why
Personal Credit
Avoid
Avoid due to high interest rates, unless you use it to pay off a loan of even higher rate.
Mortgage (Baufinanzierung)
Ok
Historically low interest rates (<2.5%), try to start with atleast 20% downpayment (more the better)
Credit Card
Avoid
Unless you can stick to paying off the whole credit each month, just avoid. Currently interest rates range 13%-19% per year!
Payday loans (minikredit)
Run
If you need to consider this, you are in trouble
Auto Loans
Ok
I 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.
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.
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
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.
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:
Earner
Savings Rate
Mr A
21.1%
Mrs A
46%
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.
“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)
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:
geldsparplan – 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 tiny piece of Amazon stock. I will write more about this in Portfolio page soon.
Let my number not scare you, I started really slow. I was investing less than 300 EUR/month an year ago and less than 200 EUR/month 18 months ago (2018).
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!
You can start with even 25 EURs/month, then and grow from there.
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. I am personally a big fan of Index funds, which are lower in costs and deliver average returns.
….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 automate it and forget about it. This is the whole premise of the famous book, The Automatic Millionaire. If you really look at it, it just makes sense, one automated step which simplifies your steps to your Financial Independence.
It makes it easier for me to plan it and worry about one less then thing to do each month.
Update: 22 June 2020
How do you open your Sparplan?
Comdirect:
If you have an account, get to the Wertpapiersparplan
Find your preferred ETFs on justETF and find its WKIN number.
Login to Comdirect> Geldanlage> Wertpapiersparplan
Click on Sparplan Einrichten
Enter your amount, minimum being 25 EUR. In the next screen you pick the funds.
Search for the WKIN which you had picked, add multiple funds if you nede.
Note the amount and the provision fees, i.e. 1.5% of the money invested goes into the fees.
In the next screen pick the frequency (monthly/once in 2 months/4 times a year), the date to buy and length of the plan.
Furnish your confirmation TAN and you are ready.
Quick questions on Tax and Residency
What isCapital gains taxes in Germany? The tax rate is 25% plus 5.5% solidarity surcharge, this should be paid at source. Some depots like Degiro do not offer this at source, and you need to take care of it in your returns.
Any tax exemptions on Capital gains? Capital gains of upto 801EUR are tax free, so for a family, this can be 1602 EUR.
Any special exemptions on Long term capital gains? Sadly, none.
Can I open a Depot account as a Work permit holder or PR holder? Yes, this is absolutely fine as you are tax resident of Germany.
If you have more questions on sparplan, then write into the comments section.
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
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.
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.
