Hiya, this is a post especially for graduates. I’m writing a series Personal Finance 1.0 on personal finance topics that you should know when starting life on your own. If you’re an older reader, maybe this specific topic is interesting for you also. Or you know someone who could benefit from this information. So please feel free to share this post.
Right, let’s get going!
This will be a very short post as I put together information and my personal tips around the topic of savings in several older posts which I’ll link to further down. You’ll remember that in my last post I suggested you’ll put back part of your salary for unexpected expenses and larger wishes. This makes a lot of sense as you won’t have to take out credit for these financial events.
But your savings also represent the first step in building investment capital. The idea is to benefit from compounding across time, which will grow your capital disproportionally to the amount invested from your savings. You should be able to use the return from your investments in traditional retirement at the latest. In Germany (and many other countries) this is really important as pay-out from the statutory pension system will be capped at approximately 40 percent of your last (or highest) salary as an employee. (If you start your own business at some point, building up income-producing assets for retirement will become even more important).
If you make a very good salary, my tip would be to aim for a higher savings rate (>30%). On the one hand, because the amount paid into the statutory pension system is capped as well. So there will be no social insurance contributions above the “Beitragsbemessungsgrenze”. The flip-side of the medal is that the rest of your salary is not earning you any pension claims either. The second reason for a higher savings rate is that you do have a real chance to become more financially independent, or even completely independent, of paid work before retirement age – enabling you to take a sabbatical, start your own business, or simply to have more options.
I’m sure you’re familiar with a different version of the proverb I used in the title of this post. And, yes, of course, it’s really “A penny saved is a penny earned”. But that’s actually not correct if you realize that you can only spend “a penny” from your net salary. Or put differently: One Euro your employer is paying into your account corresponds to significantly more than one Euro earned before taxes and social insurance contributions. And the overall tax and contribution ratio is quite high in Germany.
So this should really boost your motivation to dig through different ideas that could save you some money without having to lower your quality of life significantly. Saving should be a means to and and, not an end in itself, I think that’s important to keep in mind.
And now to the more detailed posts on this topic:
Spend Less Than You Earn (1) – Housing
Spend Less Than You Earn (2) – Food
Spend Less Than You Earn (3) – Transportation
Spend Less Than You Earn (4) – Do It Yourself
Spend Less Than You Earn (5) – Electricity, Heating, Insurance…
If you have further questions just post them in the comments or get in touch with me directly.
Financial Independence Rocks!