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Financial Planning Post

The only money principles you need to follow

person in yellow coat standing on top of hill
The road to financial freedom

I have been quiet for the past few weeks, its for the lack of ideas and lack of structure in my life which kept me away. I went back to evaluate where my life was and where I need to be. This led me to write this post on the only money principles you need to follow. As things proceed in life, I will update this again. A lot of this is obvious, but foundational!

Principle #1 : Spend less than you make

Yes, this is obvious but it is the very first step. If you are not able to consistently spend less than what you make, you are sooner or later preparing yourself for a bad situation. The key word here is consistency and not I save when I can.

Principle #2: Plan your big expenses in advance

I am not a big believer in budgets, some people are and its great for them. Instead, I like to plan for my big purchases, this means holiday trips, gifts and other things which can easily derail my monthly savings (and cause frustration). I was able to even plan ahead for the first 6 months of our baby and save accordingly.

Some might tell you to use the envelope method, and that is great too. The point is, discipline and adherence to savings happens when you already structure your spending. The technique of getting there is upto you.

Principle #3: Pay yourself first / Save before you spend

Your first spending with the exception of life essentials like rent, electricity and commute, should be for your savings. Whatever is left after that is what you need to make do with that month.

Principle #4: Understand finance basics

It is quite surprising to know when people do not understand concepts like depreciation, compounding, inflation and opportunity cost. If you do not know them well enough, educate yourself.

Principle #5: Be intentional in your life

This is my biggest money life advice, you do not need to be a hermit to be financially free, but you do need intention in every significant action of your life. Need a car? Great, plan for it, find the best car which fits your needs (and not your ability to pay). Need a house? Sure, why not, but refrain from buying a house which chains you for next 3 decades.

Do not rationalize bad money decisions

Mr A

Start understanding the difference between your needs and wants, and make every action you take on what value it shall bring to your life.

Principle #6: Pick a steady portfolio, automate your investments.

I know many people who are into trading stocks, they want to invest into big potential stocks and sell them at a profit with a short term goal. This is beyond my skill level. I do hold a few select stocks like AAPL, MSFT, BRK or AMZN but all these with a long term hold perspective of atleast a few years.

Unless you have deep knowledge and ability to stomach the risk, you should simply invest into Index Funds / ETFs as a start. I recommend picking ETFs which have low maintenance fees and coverage of an overall market. You might also want to put 10-20% of your savings into bond index funds. My preferred ETF today is A1JX52, you can research more on JustETF.com. The point is, for most of us amateurs, a select portfolio is good enough. If you do this for enough years and without cheating, you may end up being very safe.

Automate everything! If you have a select portfolio, just go to your depot account and setup a sparplan to invest on a fixed date each month into your handpicked choices.. Today all my ETF purchases and even some of my long term stock purchases happen via sparplan.

Principle #7: Stabilize your expenses and find your safety number

If you have made to Principle #7, well done! Once other things are happening as a well oiled machine, its time to think about the future.

Wouldn’t it be great if a risk to your job would not stress you out? What is that number which makes you not worry of sudden life events?

To do this, find your monthly expenses minus any big splurges and multiple it with the number of comfort months you need.

So, if you need 2000 EUR x 12 months = 24,000 EUR is your safety number to survive for an year without a worry in the world.

white and black number 11
Principle #8: Do not obsess over money everyday, let this not consume your life!

Money is a means to an end, an essential one at that. Yet, money does not need to be the only thought in your mind unless you are struggling. Find your own meaning, spread love to your family and friends, do your own thing. There there are many life pursuits which are priceless (I sound like a Mastercard commercial!), find that passion!

This also means, do not peek into the bank account or depot account status everyday, specially when your goals are long term!

So those are my 8 money principles, if you think there is something which is worthwhile and missing, give me a shout out in the comments section!

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Financial Planning Germany financial products 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:

  • 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.

….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. 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:

Schritt für Schritt Anleitung für die Einrichtung eines ETF ...
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 is Capital 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.