Recently I started to think way more seriously about my finances. I think I should have done that more than 5 years ago and I guess this is the case for many people.
I think about it in goals similar to Maslow's hierarchy of needs:
- Basic Needs: Rent, Food, Insurances, Communication
- Extended Needs: Hobbies
- Retirement: House, Monthly cost
No matter what I do, I don't want to risk my appartment. I don't want to risk having enough food and I don't want to risk that I can't afford my insurances.
Needs
Basic Needs
| Item | EUR / Month | EUR / Year | Comment |
|---|---|---|---|
| Rent | 510 | 6120 | This includes everything: Heating, electricity, waste (Nebenkosten) |
| Food & Hygene | 150 | 1800 | This might be hard to estimate. If you have a seperate bank account or pay in cash, you can just check what is currently the case. |
| Transportation | 86 | 1032 | IsarCard M and 30 EUR for visiting people outside of Munich |
| Communication | 0 | 0 | In my case Internet is included in the rent and I can use the work phone for the few calls I need make |
| Clothes | 50 | 600 | This is super hard to estimate. I basically have no idea how to do this well |
| Liability insurance | 3.34 | 40.08 | |
| Sum | 800 | 9592 |
According to numbeo I should consider a monthly cost of 1293 EUR. They think I should rather calculate with 200 EUR / month for food and only 32 EUR / month for clothes.
Extended Needs
This is highly personal. To give you some ideas:
- Bouldering: 600 EUR / year = 50 EUR / month
- Vacation: 600 EUR / year = 50 EUR / month
- Books: 40 EUR / month
- Dating: 25 EUR / month
- Going in a restaurant once a month: 25 EUR / month
- Going to the cinema once a month: 10 EUR / month
That would be 200 EUR / month.
Retirement
Now this is an interesting one. How much money do I need to live the rest of my live? You could say that it is simply "Basic Needs" + "Extended Needs". Keep in mind that both points will sharply increase when you have children. Also, as an eldery person you might have different needs compared to your current situation. On the one hand, you might be able to live in a location which is way cheaper as you don't need to be close to your job. On the other hand, you might need to be close to doctors or you might need to live in the ground floor.
Considering those is hard on its own. Let's say you want 1500 EUR / month.
Planning
The amount of money in "Basic Needs" can be used in two ways:
- Security: I want to have at least 3 months on my bank account at all times. This is money which should only be touched when the shit hits the fan. Not for Christmas spendings. I have a hard time even saying what that could be ... maybe when my employer would suddenly stop paying me?
- Minimum Income: This much money I need to make every month, no matter what.
The money you can invest is Income - Basic Needs - Extended Needs. Now we get to the interesting point.
When is it enough?
When could you happily retire and live from your fortune?
Assume you were 30 years old and expect to become 90 years old. This means there are still 60 years to cover. With the 1500 EUR / month from the retirement section, this would mean you need 1 080 000 EUR. But it does not consider interest.
Let's assume that you would get 3% interest (excluding inflation). Assuming you have a fortune of \(F\) you would need:
Once you reach one of the two points, you don't need to work anymore.
Investments
Transactional account
A transaction account (aka current account or checking account) is not for investment. It is for daily business. You can make some money when you use reward programs for changing banking accounts, but that's it. In many cases they also cost money. And this does not even consider inflation.
Certificate of deposit
A Certificate of deposit is one of the simplest and savest financial products you can get. You are guaranteed to get the money back. However, the interest is pretty low. At the moment, if you invest for 5 years you get about 0.6%. Inflation is at 1.5%, meaning you lose money.
Crowdfunding
You can invest in many different things via crowdfunding:
- Exporo: Real estate
- Kickstarter: Business ideas
I don't like them too much as I miss transparency.
Exchange Traded Funds
I like ETFs. The most important difference between ETFs is the index they track. Besides that:
- Replication: Physical or Synthetical
- TER
- Currency
- Type of distribution: Accumulating vs Distributing
- Rebalancing-Intervall: Quarterly
If you want to build up a fortune, you should invest in accumulating ETFs. If you want to live from your money right now, you should invest in distributing ETFs.
If you invested in DE000ETF9504 a year ago, you would have gotten +23.9%, but please notice that it dropped in value after the first year!