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The sooner you get an overview of where you stand financially and where you want to be at some point, the sooner you can start developing strategies for this. This way you will reach individual „between goals“ faster. I don’t want to motivate you with fear that at some point your labor will no longer be decently paid and you will probably be pushed into old-age poverty because the state simply doesn’t have enough money to pay your living expenses.
Your motivation should reflect the joy of life with all its facets. Look at risks as opportunities and at obstacles as challenges. Success is preceded by work that has to be done.
But now let’s get down to brass tacks. The fact is that you will not be taught any financial knowledge at school or in a „normal“ social environment. You have to teach it yourself. First in theory and later with your fingertips in practice. It is clear that besides job, school, relationships, hobby and co it is another burden. But it is also a fact that we live in a meritocracy where you can expect more if you perform better.
The shortcuts often seem too good to be true. And they are, even if they end in a dead end. Here is a short overview of the long road that will take you forward in a sustainable way.
What does financial knowledge entail ?
You understand how money works.
You understand how credit works.
You understand inflation, deflation, recession.
You understand the tax system in which you have your primary residence.
You understand how to make money work for you in the following areas:
Stocks, Bonds, Real Estate, Derivatives, Loans and Property.
You understand the difference between trading and investing.
You understand the difference between a liability and an asset.
You understand what hedging assets are.
You understand what insurance you need and don’t need.
You understand the current pension system and what it means for you.
You understand what living expenses you have and are likely to have.
As you can see, this area includes several topics that need to be divided into several portions. After all, you don’t want to be overwhelmed by the flood of information. I have deliberately selected only the most important topics here, so that we can build up a basis. Do not be afraid of subject areas in which you know little or nothing. You can learn everything if you have the will and patience.
The reason why you do the work is in two words: financial freedom.
This doesn’t mean per se that you will live like in retirement and only doze around lazily (no pensioner who is still healthy does that either). I would like to challenge you to take more initiative and responsibility for your decisions and actions. Then, when you reach that level, there are many more levels up. After that would come community involvement and sustainability for posterity. Start with yourself so that you don’t contradict yourself. Help yourself and God will help you.
The Stairway to Financial Freedom
We humans define our view of the world mainly through visual impressions. A blind person therefore triggers more sympathy than a deaf or mute person. I would now like to use a very simplified model to illustrate the various platoons to financial freedom.
In the case study we accompany young Tom on his way to financial freedom.
You are a blank slate: tabular rasa. You know little or nothing about your financial and professional possibilities. You have no debts but also no significant assets.
Tom, our protagonist, comes straight out of school.
First, Tom considers which industries will benefit greatly over the next 10 years. Which of these industries can afford to pay good wages? Which industry most closely matches my skills profile? What specific profession do I want to learn in this industry and what skills, what knowledge, can I acquire in this environment.
Tom makes a decision for an apprenticeship (or a study or similar). With the salary of his employer Tom builds up his first income and can pay his living expenses himself.
Tom wants to take his luck into his own hands and informs himself which books he must have read about finances. He relies on old stock market legends like Andre Kostolany, Warren Buffet, but also somewhat younger ones like Ray Dalio. He also listens to the ideas of Robert Tom Kiyosaki. Gradually, Tom learns that there are different methods for building wealth.
After his education, Tom is able to put more money aside because he lives below his means. He does not take out a consumer loan. A smaller used car is sufficient to get started. Tom reviews his obligations periodically and creates an expense/household budget.
Tom has successfully completed his training and after a 3-month probationary period, has a permanent employment contract in hand. His income has increased considerably.
Now Tom can put more capital aside. He gradually builds up a nest egg of four working wages.
Tom has built up a psychological security. This is extremely important for his self-esteem and health. It saves him the money for a course on positive emotions and stress coping in everyday life. It is often greatly underestimated how money worries have a bad influence on your well-being.
His head is free of worries and thus has more room for ideas to improve his quality of life and situation.
Tom continues to live below his means and resists the temptation to spend his growing nest egg on unnecessary consumer items.
At work, he learns more and more. It helps him enormously when he is instructed and supervised by his experienced work colleagues in the various areas of activity. Little by little, he is able to perform more and more tasks independently. He becomes aware of himself as a cog as part of a large clockwork. His self-confidence rises, but he stays grounded and aware of his layman status. After all, he doesn’t want to fall victim to the Dunning Kruger effect.
Tom has now built up enough reserves so that he can start investing money in assets. He does not yet have enough money for real estate. Tom does not want to work with borrowed capital for the time being. So he decides to participate in the capital market with shares in the success of good companies.
He inquires in his social surrounding field, (one should constantly develop its social network) how he can acquire and keep shares. A friend, who himself works at the Stuttgart stock exchange, recommends Onvista to him. Important to Tom was a low-cost custody and low order fees. As of 2020, free custody account, 5Euro buy/sell fee (data without guarantee).
After Tom has opened his broker, he considers a long-term strategy how he wants to invest. He decides to limit his single stock purchases between 1000 and 2000 Euro. Not below 1000 because of order fees and not above 2000 to minimize the risk of bad decisions.
Tom wants to start early to take advantage of the compound interest effect. Tom also wants to take advantage of the tax allowance for capital gains up to 801 Euros.
Tom does not need his invested money for 10 years and can thus calmly sit out price setbacks. Perseverance and a positive attitude towards the capital market help him to control his emotions.
Over the years, Tom has experienced ups and downs in his team. He has made mistakes that have gotten him into trouble with his colleagues and his boss. Through his open mindset, Tom has learned to accept outside criticism. He has learned from his mistakes and stopped making excuses. Fail, feedback,learn, repeat.
A small crisis always offers opportunities to grow beyond oneself.
An important skill is: how to communicate properly. This is the competence Tom wants to focus on.
Tom has experienced a crash on the stock market. For him, an emotional downturn. Tom does not let his actions be guided by emotions. His knowledge of psychology helps him to remain rational. Here it pays off that Tom has read various books on finance, psychology and personality development.
Tom keeps track of his finances with a homemade Excel spreadsheet:
Divided into the three tables Wealth Portfolio, Consumer Spending Portfolio and the Annual Living Expenses Table.
Here is a free download file.
Maybe Toms excel helps you too.
Tom does his work conscientiously, reliably and with dedication for years. Even working overtime when he has to. Tom realizes that his knowledge makes up the bulk of his salary. The work he does plus his knowledge equals his salary. The more he puts in, the more expertise he acquires. His knowledge acts like a lever after he has unique selling points. His boss now has a great deal of trust in him.
Tom’s job description is adjusted to his expertise. Tom reaches a new pay level, with significantly more salary. Now he is considered a specialist in his own field and can pass on knowledge himself. His knowledge is in demand when young or new employees need to be instructed.
Tom enjoys passing on his knowledge and encouraging others. He is aware that it is essential for the success of a company. Moreover, Tom deepens his knowledge when he imparts his knowledge to others. As Goethe used to say: learning by teaching.
In the meantime, Tom knows how to communicate properly. He applies this important skill every day when he hands over tasks.
Contrary to the years before, Tom spends much more money on wealth accumulation (Compared to spending on consumer goods and living expenses). His stock portfolio grows from year to year. Tom mainly buys when negative news causes prices to fall. Sometimes the prices of companies that are not even affected by a crash fall. He has shares of companies worldwide from different industries. He applies Beate Sander’s high courage low strategy.
Tom has also increased his nest egg for extraordinary costs that he cannot foresee (broken car, back taxes, …).
Apart from personal crises, Tom also wants to prepare for economic/political crises. In doing so, he wants to be prepared against deflation, inflation and recession.
Scenario Deflation: Cash is King. Tom builds up a cash fund for a stock market crash, real estate price crash. When stock prices fall, he buys quality stocks.
Scenario Inflation: When policy makers pump huge amounts of money into the market to stimulate the economy against a recession. This benefits strong companies when they get cheap loans. So try to be invested in strong companies before inflation.
Recession scenario: keep your running costs to a minimum. Invest first and foremost in yourself. Find out which business areas are not affected by the recession and react early to the market situation. If there are hardly any interest rates and the economy is weak, then you should invest more in physical precious metals such as gold or silver. Commodities that are in limited supply will increase in value. Gold has been used as a means of payment for thousands of years. The value of gold remains the same because its value is stable. The price fluctuates because fiat money (Euro, Dollar, Yen…) gain or lose value. As of 2020, you can anonymously buy precious metals for up to 2000 euros.
If you’re a risk taker, you can invest some money in Bitcoin. It is often touted as digital gold. The value of Bitcoin is very volatile and can also drop to zero. On the other hand, it could also rise to 10 million. Watch out for FOMO(Fear of missing out) and fear.
In my example, I describe three stages of what wealth accumulation can look like for an average worker. The main aim is to generate added value in society over the long term. The different platos should only be a thought guide and not a prescribed procedure. Imagine that you are not the user of the „stairway to financial freedom,“ but the builder of the stairway. You are building your own way to the top. If you think like this, one thing becomes clear:
The base must be built stable enough. The higher you want to go, the more stable it has to be. So return to the base regularly and do not allow it to become dilapidated.
You are the creator and user of your personal staircase. Do not try to copy someone completely. Use only his tools and material if it helps you with your staircase.
And now do not wait much longer. Get into action and take the positive out of every input. Always think of your fixed star, where you want to be. If you see only obstacles, you can thereby refuel new strength. Always stay positive and seize your chances.
Now you are asked
Your thoughts are welcome in the comments section
In which value investment do you see the biggest opportunities and in which industries the biggest risks due to disruptive change?
The following books have helped me deepen my financial knowledge:
Rich dad, poor dad by Robert Tom Kiyosaki.
The intelligent investor by Benjamin Graham
The stock and stock market driver’s license by Beate Sander(only in german)