I do not receive any commissions for this article. This article is not financial advice, but describes my individual situation. The tips relate to those living in Germany, but they are generally also applicable to other countries.
Organizing your own finances is considered a complicated task that requires a lot of expertise. It may have been that way in the past, but today all the information you need is just a Google search away. In this article, I'll introduce you to my financial system and link to helpful external resources to help you organize your finances.
Everyone Needs Four Pots
The first step in financial organization is to take stock. We need all of the following four accounts:
- A free or preferably inexpensive checking account to which our income is transferred and from which we pay our bills.
- A savings account for our emergency fund and short-term savings, for example to buy a new smartphone when the old one breaks.
- A stock portfolio for long-term investment, for example for our retirement (more on this in the next section).
- A free credit card with full monthly repayment to avoid interest, and no annual or foreign currency fee, so you can use it on vacation.
If you have more accounts than listed here, you should consider merging them. An exception is, for example, a joint checking account with your partner. So, weigh up whether the additional account is necessary. Don't worry, in Germany up to €100.000 per customer per bank are protected by the state.
If you don't know whether your account is free or if you need recommendations for a new account (in Germany), you can use the calculators of Finanztip.
How to Invest Safely on the Stock Market
In the long term, you should not leave your money in a savings account, because the interest on it is usually lower than inflation. The money therefore loses value faster than it grows through interest: you basically lose money. On the stock market, on the other hand, it is possible – even without experience and with a time investment of one hour per month – to generate a return of around 7% per year.
Thanks to so-called ETFs, this is possible for everyone. ETFs are computerized financial products that track the stock of either an individual company or an entire industry.
For our purposes, however, only one type of ETF is actually of interest. This type of ETF tracks the global economy and contains over 1,000 companies. This means that the risk of losing money is very low because it is spread across many different companies. Anyone who invests in this type of ETF is effectively betting that the world economy will grow in the future.
Nevertheless, you must not forget that you have to invest in the stock market for the long term. Over a period of 15 years, you can achieve an average return of 7%/year. With a savings plan you can invest a certain amount in your ETF monthly, every two months or once a quarter. With most banks, savings plans are available from €1-20 per payment.
I personally invest in the MSCI World, but there are other ETFs that track the world economy. To find out which ETF is best for you, you can use the ETF calculator from Finanztip.
Financial Basics
Keeping a budget book
Everyone should keep a budget plan. This way, you can keep track of everything and recognize when you are spending too much money in certain areas. However, you should not overdo it and write down every small transaction, because otherwise a budget plan can also have disadvantages.
The 50/30/20 Rule
The 50/30/20 rule describes how you should spend your income. 50% for necessities and 30% for leisure/fun. The last 20% go to your savings. In my article “The Only Financial Rule You Need” I explained this universal principle in more detail.
What to Do in Case of a Stock Crash?
It's best to check the performance of your stock portfolio only once a quarter or year. This will prevent you from getting too worried about stock market fluctuations.
If you do experience a crash, it is very important that you remain calm. Don't sell your ETF shares in a panic, just sit out the crisis. Remember, if you invest for 15 years or more, you will almost certainly get a good return.
You should only sell ETF shares as you approach your payout date. If you need the money from your ETF in five years, for example because you are retiring, you should not trust that the stock market will do well then. Instead, you should sell shares on a monthly basis, similar to the savings plan with which you deposited money every month, so as not to withdraw all your invested money at an unfavorable time.
Any Other Questions?
I am not a financial expert, but have acquired my knowledge through various resources. The Finanztip website as well as some financial books, first of all the German book “Young Money Guide” by Henning Jauernig, were helpful.
Most of the information can be found quickly by searching on Google. If something is still unclear, don't ask your bank advisor, because he only wants to sell you financial products. Instead, hire an independent financial advisor who works on a fee basis (not for commission!) and contractually guarantees to give you independent recommendations.