financial
independendence
I must warn you, my son!
If you look more exactly at the ancient philosophers from east and west, the two rules of my world formula, in which it is about "goals" and about "attitude", are not a big topic there. For the old experts, it was crucial to cultivate one's inner self and not to place increased value on outward appearances. The pursuit of personal goals was not expressly discouraged, but one's hopes for success should not be set too high. Disappointments would be pre-programmed, because - as we have learned - certain things are not completely in our power. These include success, prestige and wealth. Moreover, the ancient philosophers were very concerned with moderation and balance ("not too much and not too little"), and they repeatedly warned against desire as the cause of all suffering.
Nevertheless, one of my ten goals as a young man was quite deliberately "financial independence". By achieving this goal, I wanted to buy my individual freedom to be able to do only what I enjoy from "day x" on. At the age of 50 - that's how I formulated my goal - I wanted to be ready.
Please remember again the 3 circles of my world formula:
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I have full control over the formulation of my goals, because this is about my desire and my thoughts
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with my decisions and actions (which are again subject to my full control) I have an influence on the achievement of my goals, but never a guarantee to actually achieve them - no matter how much effort I put in or how clever I am in doing so
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the result success or failure I have to accept anyway, because the achievement of the goal (the success) is not completely in my hands (acceptance)
Take the examples of "war", "illness" or "Covid 19": You can be as good as you want in your job or in your ventures - external influences can throw a spanner in the works at any time. What good is my financial independence if a global economic crisis with hyperinflation and a stock market crash comes knocking tomorrow, or the next war turns our lives upside down? Nothing. Hot air, smoke and mirrors - nothing more.
Conclusion from my point of view: If you don't cling too much emotionally to your goals, but instead calmly and steadily pursue your measures to achieve them, and if you enjoy the journey above all else, there is nothing to be said against big goals in my opinion. After all, life is supposed to be fun and who wants to (and is able to) deal exclusively with philosophy from morning till night at a young age?
If, after these words of warning, you are still interested in how you can manage your finances better than the majority of people, I will be happy to give you the decisive tips.
Because - as I said - you always have a certain influence on it!
Frugality is natural wealth,
luxury artificial poverty.
(Socrates)
Carelessness is the satisfaction of today's needs from tomorrow's income.
(Ambrose Bierce)
I will manage my means so that little shall go far.
(Shakespeare)
Summary IN ADVANCE
I systematically build up a fortune by
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permanently living below my means, i.e. that I only spend the money I actually already own,
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not incurring debts, but saving/paying myself instead
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and putting my money into income producing assets.
Over time I will become a financial expert. I invest intelligently by
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spreading my risk,
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only buying things I know something about,
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using stocks as a return booster, investing in ETFs,
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taking advantage of compound interest, and avoiding market timing.
I regularly and intensively take care of my money and my private finances, keeping careful records.
financial rule 1
Live permanently below your means
First things first. This simple rule is already able to prevent the biggest trouble. Do not spend more money than you have. So simple and obvious, but obviously so difficult. Don't base your spending on your desires. Please decouple them from that. Orient your expenses only to your possibilities, to your incomes. Do not buy superfluous junk.
Be frugal.
Never spend more money than you have. On the contrary.
Learn to get along with less than you have and invest the difference in your future. Pay yourself, not others.
SAVE !
financial rule 2
Don't go into debt, always pay yourself first
You buy a consumer good with money you don't actually have. ERROR! If you save this amount instead, you have the possibility to use your assets for income producing investments, i.e. to collect interest or dividends yourself. Therefore, please refrain from such expenditures or at least postpone them until the time when you actually have the necessary money. Anything else will cause your personal hamster wheel to spin faster and faster, so that at some point you will no longer be able to keep up and will fly out of the big consumer merry-go-round. And then it's usually not done with a few bruises: private insolvency, burnout, relationship crisis - the whole program. Therefore:
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Do not take out consumer loans !
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Never overdraw your credit card !
So now we are already to the point that we only spend the money we already have. And from the money that is left over, we take it upon ourselves here and now to save a decent amount. Why is that the plan? Because it pays off very quickly if I pay myself first and only then pay others. SAVING means nothing else than paying yourself.
financial rule 3
Invest in income producing assets
By following rules 1 and 2, you have already succeeded in putting some money aside. What are you going to do with it now? The money should not just lie there, it should work for you. In the optimal case you sometime even hand over the working completely to your money.
People with low income and the middle class work for their money. The rich make their money work for them. The rich invest in income producing assets, the middle class invests in liabilities that are sold to you as assets (e.g. for your own house and second car there are permanent additional costs in the form of interest and taxes). The early and continuous investment of saved (not borrowed) money in "real" assets such as shares or rented real estate provides the rich with a sustainable additional income in the form of dividends or rents and ultimately leads to a relaxed, self-determined life. In contrast, "investing" in liabilities (borrowed money) combined with a steadily rising standard of living leads to a restless/breathless life on the hamster wheel for the middle class.
Income producing investments:
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Stocks/company shares (also via ETFs) = dividends + value increases
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Rented real estate = rental income + value increases
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Bonds, savings = interest payments
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Life/annuity insurances = increase in value via interest and other earnings
financial rule 4
Become a financial expert
We have already talked about this. If you read and are interested in all kinds of topics, you have a clear advantage. Therefore, I would like to recommend this to you once again. Even if the topics of private investment, finance and business are not of great interest to you at the moment, it's about your future. And as exciting as other topics are for you today, the world of business and finance can be just as exciting.
Who is making the running right now? Which products or services are you using more and more? What excites you? Which brands, products or services do you like less and less? What do you hear from friends and acquaintances? What do you read about these things? Just keep your eyes and ears open, draw your conclusions and act, i.e. invest accordingly.
Become a financial expert: read daily newspapers (the business and finance section), trade journals and reference books: be interested in companies, entrepreneurs, products/concepts/ideas, self-management and investment/finance.
financial rule 5
Invest smart
What do I mean by "investing smart"? Stick to the following principles:
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Spread your risk
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Buy only what you understand - decide for yourself
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Use stocks as a yield booster and invest in ETFs
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Use the compound interest effect and avoid market timing
Never put all your eggs in one basket! Your investments are also "fragile", not every speculation works out. Therefore: diversify your investments, spread them over the different pots. Nobody can predict the future. But you can draw some conclusions from the past. And an important insight is: spread your risk. It's not for nothing that Aristotle Onassis believed that "it's easier to acquire a fortune than to keep it."
Albert Einstein referred to compound interest as "the eighth wonder of the world." I'll explain later how you can use it concretely for your goals.
Financial rule 6
Take care of your private finances regularly and intensively, keep careful records
Get an overview of your private finances once a week - e.g. on the weekend. I can only recommend you to use a financial software for this purpose. The insights you will gain over time will more than make up for the effort.
How much money do I spend on travel? How much for food? How have my expenses for energy developed? How much does my car cost me, how much my hobby? What is left over each month? How are my assets developing?
What you know, you can influence. Make yourself a picture to be able to do finetuning on a regular basis.
Not in the mood? You don't want to invest this time? OK. Then I have to accept that. What I strongly recommend to you as an alternative is to create and maintain a detailed asset overview as an Excel file. With this you are also able to make your own personal financial planning, to control it continuously and to adjust it.
Financial rule 7
Follow the advice of the McKinsey experts
The partners of the successful management consulting firm have a golden rule for how best to safeguard your wealth:
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No third house
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No second wife
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No first boat
From my side there is nothing to add.
Please think carefully about what these three distinctive calls have to say to you.
finance rule 8
Travel light
You will experience it: sooner or later you too will become a hunter and gatherer. What you don't need everything in life. You buy too many clothes, things, stuff. And one day you realize that your closets are full, in your attic are clothes that no one will ever need again. Such things are a burden, you lose the overview, the perspective.
At some point you have to start giving away or throwing away one old item (better two) for every new acquisition. Believe me, it's freeing. But I can understand that this doesn't seem so important to you at a young age. It isn't. It will be. But you should have heard of it before, because even at a young age it can make sense to focus on the essentials.
Less is very often really more! You save money and a lot of ballast and the big clean out later in your life.
excursus
ETF investment
Experience shows that you can earn more money with shares in the long term than with all other investment opportunities. But: the risk of losing (temporarily) a lot of your money in the short and medium term is also greater. Because stocks should be an important component in your financial portfolio, I would like to give you a few tips on how you can quickly achieve good results even without great financial knowledge. Let's take a look at the S&P 500 index since I was born. A stock index summarizes the performance of all companies included in it to a number. In this case, it is the performance of the 500 most valuable and therefore largest listed companies in the USA. Although there have been severe setbacks over the years - if one had simply bet on the S&P 500 index, i.e. on the 500 most successful companies in the USA in each case, an average of 10% performance/return on investment per year was possible.
Which companies currently have the greatest potential in terms of future price gains? There are actually some people who find exactly these companies and stocks and make blindingly good money from them. Warren Buffet is one of them. He is an expert. He can really read corporate balance sheets and their income statements, he can spot the hidden gems that are about to shine again. Over the years, this has made him one of the richest men around. His investments converge in his publicly traded company, Berkshire Hathaway, in which you can participate as a shareholder. Most of the money Warren Buffet has accumulated in his lifetime will be donated to good causes after his death. He has also already clearly directed in his will what should happen to the rest of his inheritance:
"Invest 10% in short-term government bonds and 90% in a low-cost S&P500 index fund."
So he is not - as might be expected - letting the best asset managers get their hands on his money to grow it for his heirs after his death. He's giving a clear instruction. The S&P500, as I said, tracks the value of the 500 best, because most valuable, companies in the U.S. at any given time. And Warren Buffet, in his 80+ years of life, has now found that companies/stocks not only provide the best wealth preservation, but they actually increase one's wealth tremendously if you just give them time to work and make money. What about a stake for real estate or gold or cash? Don't care! Companies are productive and innovative - people work there for their own success. And the diversification? Why not add a DAX and/or emerging market index fund? Buffet is American, he knows his way around and believes in the future of his country. He believes that all crises will be overcome there sooner or later, just as they have been in the past. A diversification of 500 top companies is quite sufficient for him.
Yes, but then I could just replicate his legacy as a layman and build myself an equally cheap and successful portfolio - and without having to read all the books and publications by companies, all the magazines and newspapers! THAT'S EXACTLY HOW IT IS!
ETFs are "index funds" and therefore the low-cost alternative to an actively managed stock fund. They replicate an index 1:1 by buying the stocks that make up that index. They give you the opportunity to own, for example, a share of the best 500 US companies (S&P 500) or the 30 best German companies (DAX). The management effort is comparatively manageable, as the index only needs to be tracked. And computers can do that, too. There are ETFs that "reinvest" the dividends. In these cases you get your right via the higher prices. Or you can choose a "distributing" ETF. In this case, the dividends are paid out regularly, but the management fee is somewhat higher due to the associated expenses. The so-called "total expense ratio" of the "iShares S&P 500 ETF" (WKN: A0YEDG) is a very manageable 0.07% (!) per year. And something like that doesn't only please Warren Buffet. The entire performance of your companies ends up in your assets, not in your bank's account. If you had invested money in the DAX in 1966 (there is also an inexpensive ETF for this - WKN 593393), you would have been 8.3% richer per year by 2014. If you think German companies are more promising than US companies, invest in the DAX and not in the S&P500 - or split your investment.
So what should you do? Saving for the long term pays off. So start saving NOW and in addition to the previous findings
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shares are a yield turbo
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an investment in ETFs is usually better compared to funds or individual investments
take advantage of two other important findings: Use compound interest and avoid market timing.
The power of compound interest comes from denying yourself the payout of interest (or dividends) due each year and reinvesting the money right away instead. Gone is gone. Pay yourself! Between 1965 and 2016, the S&P 500 had an annual average return of 9.7% (including dividends). Good companies, lots of time, compound interest - you're done with a nice fortune!
So how do you approach the topic of ETFs in concrete terms? You simply take your monthly available savings amount, with which you want to pay yourself in the form of shares, and invest it month by month in a favorable share ETF. There are savings plans for this, which good direct banks can offer you at low cost.
One of the most important tips that experts like Warren Buffet always give you is: Don't try to time the market, i.e. sell in the supposed knowledge that the market will soon collapse and buy in the supposed belief that things will soon take off again. This is the tip I personally have taken to heart the least in my life - which in hindsight has cost me quite a bit in returns. Market timing is a FAIL! The alternative of simply investing a regular amount in stocks or ETFs and waiting it out lets you sleep easier. If the prices rise, you buy comparatively fewer shares, if the prices fall, you get comparatively more shares for your monthly savings amount (so-called cost-average effect). Once again: Time + good interest = solid asset accumulation.
Personally, I am currently betting on the following ETFs:
WKN A0YEDG - iShares Core S&P 500 UCITS ETF (Acc) - The 500 largest companies from the U.S.
WKN A0YEDL - iShares Nasdaq 100 UCITS ETF (Acc) - The 100 largest tech companies from the U.S. (greater overlap with A0YEDG - but may offer an additional "kick")
WKN A111X9 - iShares Core MSCI Emerging Markets IMI UCITS ETF (Acc) - Emerging market equities from around the world.
The alternative to A0YEDG, if applicable, would be.
WKN A0RPWH - iShares Core MSCI World UCITS ETF USD (Acc) - access to international equity markets in 23 developed countries.
However, because of the currently very high valuation of US companies, the MSCI World is also composed of a very high proportion of US heavyweights, I prefer to buy the original. I selectively add German equities to my portfolio as individual stocks, as well as top U.S. companies from which I expect either a "turbo price effect" or regular, above-average dividends.
good
luck!
Saving is good income.
(Marcus Tullius Cicero)
With the money we don't have, we buy things we don't need to impress people we don't like
(from the movie "Fight Club")
Bound by debt is bound by worry.
(From Norway)
Stranger things are possessed when one possesses superfluous things.
(Aurelius Augustine)
Remember - it takes very little to live a happy life.
(Seneca)
happiness is the ability
to renunciation.
(Seneca)
Those who can live in tents stand best.
(Goethe)
It is the mind that makes you rich.
(Seneca)
A thing that belongs to many is managed worse than a thing that belongs to one.
(Aristotle)
There are many ways to get rich. One of the best is thrift.
(Francis Bacon)
Nothing wears out a car more than when the neighbor buys a new one.
(proverb from Germany)
If you want to make (a person) rich, then do not give him more money, but decrease his desire.
(Epicur)
With animal-like busyness one accumulates a mountain of wealth, but life remains poor.
(Epicur)
Many people who acquired riches did not gain liberation from their sufferings, but only exchanged greater sufferings for them.
(Epicur)