How do you manage your personal finances

There are things in life that we just don't like to deal with.

Especially when it comes to finance, this aversion is extremely evident among Germans.

Here are a few facts:

  1. 73% of people in Germany would rather go to the dentist than take care of their own finances.
  2. 51% of Germans believe they have poor financial literacy.
  3. 75% of Germans brooding over their finances as they fall asleep.
  4. 36% of Germans see the potential for conflict in the relationship in finance.
  5. Financial literacy is one, according to Swedish researchers "Significant" factor for cardiovascular risks.

The last two points show: It's not just about saving 100 euros more a month - but above all about your physical health and fitness, which you endanger with poor financial planning.

Most people have a major financial headache when they think about their retirement savings.

The leap into retirement is a critical challenge for those who have not made private provisions in good time. As a "normal" employee, a large part of the monthly income simply breaks down, while the costs tend to remain constant - if not even increase (e.g. due to increased health costs).

In addition, experts expect that the statutory pension systems will not be able to maintain the current pension level in the long term. This in turn increases the pressure on private old-age provision, which in turn requires sound financial planning.

What does financial freedom mean?

Financially free who can live on passive income alone.

This can mean, for example, that from the age of 67 you have a net income of € 2,100 a month for the rest of your life, from which all fixed costs (rent, food, etc.), but also expenses for “luxury “(Traveling, eating out, etc.) can be financed.

However, this is rarely possible without early private pension provision.

Because: People are getting older and the pension system we all trust is crumbling. The pension level is already at a low level - the trend is pointing further down.

On this basis, basic security cannot be achieved through state payments alone. In any case, you should make private provision for old age, so that in the best case scenario you can actually live on passive income streams alone.

To put it into perspective: This goal is more than sporty. After all, you have to build up a fortune of around half a million euros (6% assumed return).

However, it is feasible (with the right plan).

This is how long it will take you to reach your financial goals

Financial freedom means something different to everyone. Depending on when you want to achieve which financial goal, the required monthly savings rate also changes.

But one thing above all else is important for the start: Set yourself goals and stay tuned. This is the only way you will be successful in the long term.

Insider tip: Write or draw your goals on a piece of paper and hang it in your room, bathroom or kitchen. What sounds a lot like a kindergarten trick is at the end of the day a clever psychological hack that is used in everyday life by people like Bill Gates, Jeff Bezos or Barack Obama.

One tool we recommend for finding out when you are financially free is our Financial Freedom Calculator. Have a look and feel free to give us feedback in the comments.

A budget book can help you with this.

That's right, Grandma already had one.

But, I promise you that it is an extremely efficient tool with which you can understand your personal financial behavior very well.

In this chapter you will learn

  1. how to get an overview of your finances,
  2. how to calculate your future savings rate
  3. and how the 2-account model helps you save.

Track your expenses with a budget book

Keeping a budget book actually means nothing more than listing all income and expenses every month and calculating the surplus from them. Be honest with yourself, this is essential.

All expenses mean: every pizza, every bar visit and every monthly subscription.

This works on the one hand analog with paper and pencil, but also digitally: for example with our free Excel budget book template or a finance app.

To be listed first your earnings. In addition to the net salary, this can be income from a part-time job, child benefit, BAfög, grants or other income.

In the next step, you enter your expenses under the income. Start with the fixed costs, i.e. rent, costs for insurance, subscriptions, mobile phone contracts and other memberships.

This is followed by your variable costs. This includes groceries, expenses for eating out, clothes, etc. Make sure to enter all costs here in order to get as precise a picture of your personal finances as possible.

How long should you keep the housekeeping ledger? That is entirely up to you. If you are consistent, you should have a feel for your consumer behavior after about 2 months.

It is important to discover potential savings early on and use them for your financial goals.

I would recommend you stay tuned for as long as possible. It's a good tool to keep motivating yourself.

Now we come to the topic of saving.

Set your personal savings rate

Once you have entered your income and expenses, our Excel tool calculates your monthly surplus - specifically: your potential savings rate. This is the amount that you could save or invest each month.

The average savings rate for private households in Germany was 10.9% in 2019. With an average net income of 2,100 euros, that's around 230 euros per month.

In any case, there is upward potential, because we simply spend too much money on small things, the costs of which we individually underestimate.

For classification: A savings rate between 20% and 30% is considered very good.

In this case, one must take into account that the 10.9% represents an average value that differs greatly, especially between age groups. A low savings rate is less tragic in old age than in younger years.

It gets difficult when you can save less than ten percent of your income. In this case, it is important that you think about how you can reduce your expenses and, ideally, increase your income.

In this case, too, hanging your head is not a good idea.

Because there are many ways to save money.

Automate your savings behavior with the 2-account model

Of course, there are also low-wage earners who have no choice but to spend 80% or more of their net income on a living.

In all other cases, it is simply important to build a system that forces you to save (in a positive sense as an investment in yourself).

The whole thing follows a simple psychological principle. If you pay a fixed amount by standing order to another account every month immediately after receiving your salary, you won't even be tempted to spend the money on consumption.

I use for it the 2-account system.

You can expand the 2-account model to include many more accounts with individual savings goals (so-called multi-account model).

Account no. 1 is your current account, to which your salary is paid every month. Your savings rate should be transferred to a second account (daily money account) as a standing order immediately after receipt of your salary.

There is no interest on a call money account, but this account is not intended for that either. It's about building up a reserve for emergencies or spontaneous expenses that you can't count on.

As soon as you have saved five to six net monthly salaries as "nest egg" on the daily money account, you direct the transfer to your clearing account at your custodian bank. From there, you can start investing and building wealth for your financial freedom.

Et voilà.

The path to financial freedom may seem arduous and tedious at first. But every path begins with the first step.

Now is the time to put what has been said into action. You know how to get an overview of your finances and with the help of the household book you also know how much you can put aside each month.

In the next step, you should think about how to invest your money sensibly.

Because: There is no interest on the clearing or checking account and inflation is gnawing at the value of your assets.

In our guide to passive investing, we explain what options you have to make your money work for you with the help of ETFs.

Stay tuned, even if you get the feeling that you are “tired” of finances.

It is worth it in any case!