In January of 2018, my personal finance situation was a mess. I had no idea how big my fixed costs were, I didn't know if my few stocks made some bucks, I spent more money each month than I would admit here and my savings where basically zero. I lived paycheck to paycheck and now I wanted to finally start to build up some savings. A year later I can tell you: this was the most impactful change of last year. The goal is simple, yet so fucking hard for most people: spend less than you earn.
Spend less than you earn. Duh 🙄
Not a magic formula is it? It took me a year to get there and here's what I would recommend to do.
Create transparency. We can't fix something that we can't see. We don't want any surprises when we log into our online banking and no red numbers anymore. Open up a google spreadsheet and start typing. Not how much we spent on breakfast this morning but the overall stuff. We want to be able to answer these questions:
- How high are my fixed costs exactly (to the cent)? Rent, car, Spotify, Netflix, insurance, internet... everything that's due every month/year, same amount.
- How big is our dept? Paying off an iPhone? Bought an apartment? List everything.
- How much do we roughly spend on Restaurants & Cafés, Shopping (Gadgets, Clothes), Vacation, etc. each month?
- How much do we earn?
With that overview, we can already see how much we earn vs how much we spent. Is the delta satisfying to you? We need to take care of that delta.
To do so, we want to immediately see when things go wrong so we need more structure. We can do that in several ways but here's what I did:
I created several bank accounts:
- Basis Account - where my salary lands and my fixed costs are being paid from.
- Every Day Account - where I pay everything else from. It is what I pay with every day.
- Savings Account - where I save money.
- Investing Account - where I put money to invest. It's also the allocation account for the stock portfolio
- Stock portfolio - it holds my investments in stocks
The basis account is the distributor that transfers budgets per month to all other accounts. Now, most accounts should be fine, except for the Every Day Account. It's where we might fuck things up.
That's why we need to optimise our spendings. Look at what you spend money on and try to reduce it or at the very least, spend it more consciously. The only thing we have to do is to spend less than the budget. I recommend to set your line of credit to zero. That way, you can't go into negative. If you don't have enough money on your account to buy something, you can't afford it. Simple as that. Additionally, let's look at our fixed costs and reduce them over the next few months to increase that delta we love so much.
Pay yourself first!
The by far most important point however, is to pay ourselves first. Pay yourself first! We want to build up savings, maybe create some wealth, why would we only use what we have left after everyone else is paid? We pay ourselves first. The first transfers we do after our salary arrives, are the ones to our savings and/or investment accounts. Then, we live off the rest.
These where the first steps to get my personal finance under control. I went from saving nothing, to exactly 27,97% of my monthly income. I will raise that by at least 10% this year through reducing my fixed costs. If I get a salary raise, all of that will be added too. It sounds stupid, but I like to log into my online banking now. Seeing the numbers getting bigger is an achievement for me and it adds a strange feeling of security and lightness. In 2018, I had my first vacation where I did not went into the red (dept).
PS.: Honestly, financial education is one of the most important (and underrated) topics. Although this was already an amazing positive change, I've progressed further and barely scratched the surface here. Check out this excellent article that goes into more detail in personal finance.