Thoughts on Personal Finance

Care about your money because no one else will do!

Some people like bankers or insurance brokers claim to care about your money. What they really care about is how they can make as much as possible of your money their money.

When I started working I made the mistake to sign a whole bunch of life insurance contracts as well as income protection, accident insurance household protection and so on and so forth, without informing myself about the costs. I felt quite save and then I wondered why I wasn’t a millionaire by the age of 30 🙂

Joking apart, I gave the control over my money away to some folks I barely knew. (Besides investing by buying some shares in a randomly fashion)

Eye opener

I cannot remember how I came across this book but Ramit Sethi’s
“I Will Teach You to Be Rich” was some kind of revelation because it showed me how bad the return on investment from my pension insurance really was going to be. The insurance companies are taking huge fees to sell you managed funds with high front-end load and total expense ratios. Meanwhile 96% of all managed fund perform worse than the market itself.

The other big takeaway was the “CEO” rule. I will ponder on that later

But it actually took me a couple of years until I acted upon those tips. Some of the reasons might have been that you couldn’t map the advice to the situation in Germany. E.g. in Germany you cannot get saving accounts with sub-saving accounts for free. Another reason might be that admitting you made a wrong decision is really hard mental work.

Plan ahead

In 2015 I started to track my spending. The trigger for that was that my wife and I started looking for real estate. I tried some classic apps for housekeeping books. And then I stumbled upon “YNAB – You need a budget”.

Their concept got me hooked!

Instead of only tracking how much you spent on things, you have to figure out how much you really want to spend on a category like eating out, vacation, gifts and so on. With this app I could finally map most Ramit’s concepts to my situation.

I logged all my saving accounts, share portfolio and so on into the app to get a complete overview of my financial situation.

Then I created categories for every major spending area and started tracking. I knew from the beginning I had to do a complete one year roundtrip to know exactly how things would work out, because many payments like car insurance and maintenance or house contents insurance will only occur once a year.

Here are our main categories:

  • Daily Expenses
  • Monthly Bills
  • Rainy Day Funds
  • Saving Goals
  • Charity

Daily Expenses

These are the things You buy from day to day in Germany still mostly with cash. My wife and I came out with:

  • Lunch J
  • Lunch M
  • Eating out
  • Groceries
  • Diapers
  • Gasoline
  • Gifts
  • Spending Money J
  • Spending Money M

Eating out: We love ordering pizza and eating steaks or going to a Greece restaurant. But we decided as well that we don’t want to spend more than 100 50 bucks per month.

Spending Money:  this category is meant as guilt-free, no justification category. If I spent it on black jack and hookers, it’s ok 🙂

Monthly Bills

These are the costs that appear every month. When these appear only once a year you have to budget the amount divided by 12.

  • Rent
  • Side costs (heating, garbage collection)
  • Electricity bill
  • Internet provider / telephone
  • Accident insurance
  • Household protection
  • Third party insurance
  • Car insurance
  • Car service

Rainy Day Funds

  • Emergencies

This one is an important one. I know many people who don’t save for emergencies. What is an emergency? We defined it as: “things which need to be replaced immediately when broken”. Washing machine, tumbler or an unexpected car repair.

Saving Goals

  • new car
  • holiday
  • equity capital
  • new furniture / renovation

Money  – Master the Game

To become wealthy  – according to Ramit Sethi –  you can do three things:

  • C – Cut costs
  • E – Earn more
  • O – Optimize spending

Where do I cut costs?

  • Cancel unused internet domains
  • Cancel magazine subscription of magazines I barely read
  • Cancel gym membership

How do I earn more?

  • eBay auctions

Stuff that I haven’t used in the last two years can still do some good when you give the money to charity.

How do I Optimize spending?

  • Negotiate car insurance fees
  • Change power provider
  • Cancel live insurance
  • Switch bank accounts and share portfolio to direct banking

Last year I bought Tony Robbins’ book “Money – master the game” and it helped me crossing the Rubicon regarding my life insurance contracts by showing again how senseless these contracts are.

To underpin my decision I opened an excel spreadsheet and went through the pain of calculating my loss of my life insurance contracts. After crying about my stupidity for several days I wrote the cancellations. After I received the repayment of what was left I put the money into low TER ETFs.

Money and Partnership

When you set up your goals and budget it makes sense to do it together with your significant other. The worst case scenario is when one is planning and the other one is spending disregarding the budget altogether. My wife and I always kept separate bank accounts with one common account for the rent and everyday expenses. We figured out how much we spent on things we profit from together and transferred money to the common account relative to our income.

But as soon as you’re going to purchase bigger items like a car you have to put your money in one basket. So today we are more like keeping virtual accounts via YNAB.

Bottom line

The truth hurts a bit:

You have to dedicate a good amount if your time to manage your finances!

But it will save You a lot of trouble and sleepless nights. After You budget all your costs and long term saving goals you can be frustrated that your spending money is sometimes not much more than pocket money. But in the end budgeting helps you focusing on your financial goals and priorities.