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!
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I bet it feels really good to earn your own money now. And maybe you’ve already thought of loads of things you’d like to buy. Or you finally want to treat yourself to that cool new car, or a posh, large apartment.
Sure, you could do all that. Just make sure those are things you can afford on a sustainable level. And keep an eye on your liquid funds. You don’t want an unexpected emergency to leave your account in the red. (Also, it would be smart to invest part of your disposable income for the future. But we’ll get into the details of that in a separate post).
Consumer debt is a really bad idea
Why is it so important to live within your means? It’s so easy to get a credit card and only pay back the minimum, right? Simple answer: anything you take out debt for, will cost you more than its original purchase price. So you’ll end up with even less of your salary than before.
Worst case: the item you bought is already gone, and you’re still paying interest on it. This is annoying in the case of financing your vacations, but it could become a real problem when taking out debt for purchasing a new car, given the sums involved: if you happen to lose your salary in a recession for example, the current value of your car might not cover the remainder of the debt. That’s why consumer debt is a really bad idea, you’ll find some more information in this post.
Set yourself a savings goal
That’s why I’d recommend you come up with a broad plan on how you want to put your salary to use. There are necessary monthly costs, such as your rent or food, maybe you have to buy a public transport pass to get to work. On top of that there will be costs, for example, that are lowest when you pay annually, such as insurance policies. Just re-calculate those to come up with the monthly equivalent. And then you’ll have expenses for the lifestyle choices that are important to you, such as sports or going out with your friends.
My suggestion to a graduate would be to try keeping all those expenses below 80 percent of your net salary. That way, you can put back 10 percent für larger wants (vacations, new furniture etc.). And you can use another 10 percent to start building up your emergency fund – for real, unexpected emergencies – to three to six times your necessary monthly expenses as quickly as possible. That way, you’re in a pretty safe position even in the event of a temporary job loss. If you want to have a look into what comes after the emergency fund, check out this post.
Do you know how much you’re spending?
I take it that you already have running costs. But maybe you don’t know the exact details off-hand? If that’s the case, take a deep-dive in your expenses status quo first. Just to give you an idea how much of their salary other people are spending on different categories of expenses: In Germany about 35% go to housing, 15% to groceries, and another 15% to transportation (the split seems to be similar in a lot of other countries). You can find more data on other categories – not necessarily the same one you’d use – on the Statistischen Bundesamt’s web page. Their table offers some insights with regard to expenses relative to household size as well, more on that later.
So now you’ll know where you’ll find yourself expense-wise in comparison with the average person in Germany. If you already spend less than average in some categories, great – that leaves you more headroom. If your expenses are above average, you could think about ways to lower them. I’ve put together some ideas for the biggest categories Housing, Food and Transportation in the linked posts.
A real-live example
That’s all still quite abstract so far. That’s why I want to give you a practical example. Our son has kindly allowed me to share his graduate budget on the blog. He’s 22, lives in London and has a graduate position in a big company. So that’s quite an expensive city to live in, not only where rents are concerned. No surprise, maybe: he seems to be a tad influenced by his Financial Independence infected mother ;-), and had planned to save and invest part of his salary right from the start.
He originally lived in a flat-share for professionals. The flat wasn’t particularly nice, but had the advantage of only being a 10-minutes-walk from his place of work. At this point, he’s moved into a small 1-bedroom apartment with his girl friend. The apartment is further away from work, but the overall housing situation is a lot more pleasant.
Economies of scale
You can generally generate savings when you run a household with more people versus living on your own – that is if an additional person brings in an additional income as well. There’s evidence of this in the Statistisches Bundesamt table as well. This is because there are certain base costs that can now be split across a greater number of people.
You can probably generate the biggest savings when you move from a single studio-household into a 2-people-1-bedroom-household. Again, as long as each has an income – and you’re not inflating your lifestyle.
It’s not about ultimate savings, but about setting priorities
In the case of our son, housing costs actually went up. He’s sharing rent with his girlfriend in proportion to their salaries, and she works in a sector that pays considerably less. But he’s now saving on week-end train rides, plus his girlfriend has a car they can use to go places. And she’s a great cook, so they don’t eat out very often anymore. Quite a nice way to keep costs under control without losing out on quality of life.
That’s super-important, I think: It’s not about saving at all costs. Just make sure you stay within your means and put some money back. If you keep doing that you should be very much alright.
Here’s the beef
And now for the real numbers :
(I haven’t put the currency in. Which is obviously British GBP in reality, but given the high cost of living in England, I think you can pretty much transfer it to Euros one-to-one.)
1-Room in Flat-share
| Income | ||
| Salary net | 2.310 | |
| Expenses | ||
| Rent | 750 | 32% |
| Utilities | included in rent | |
| Council Tax | included in rent | |
| Groceries | 250 | 11% |
| Transport | 100 | 4% |
| Entertainment | 100 | 4% |
| Misc. (Clothes etc.) | 50 | 2% |
| Student Loan | 210 | 9% |
| Savings | 850 | 37% |
2-bed-apartment
| Income | ||
| Salary net | 2.310 | |
| Expenses | ||
| Rent | 1.000 | 43% |
| Utilities | 40 | 2% |
| Council Tax | 100 | 4% |
| Groceries | 100 | 4% |
| Transport | 20 | 1% |
| Entertainment | 100 | 4% |
| Misc (Clothes etc.) | 50 | 2% |
| Student Debt | 210 | 9% |
| Savings | 690 | 30% |
Just a short explainer: If you’re not familiar with English salaries, the net salary might strike you as fairly high. Taxes and other contributions for statutory social insurances are significantly lower than in Germany, but then what you can claim from unemployment insurance, for example, is way less as well. Overall, gross salaries tend to be lower and net salaries higher than in Germany.
The median graduate gross salary is currently at 30.000 GBP for top employers, the general average is at 21.000 – 25.000 GBP. As cost of living is particularly high in London, some employers based in London reflect this in their salaries.
Understanding your household budget will be an advantage
Why do I share this budget? So you can see that it’s actually possible to save some money, even on a graduate salary and when enjoying living in a city as expensive as London. Which, by the way, goes for my son’s girl friend also, she manages to save part of her income for post-graduate study. As blogger Paula Pant always says: You can have anything, just not everything…:-)
I’d love to have inspired you to think a bit about your own household expenditures – it will definitely be worth your time.
If you have further questions just post them in the comments or get in touch with me directly.
Financial Independence Rocks!
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