Your Finance 101

Your Finance 101

Finance - something we all chase: "financial" freedom. The freedom to live how you want and cover your expenses without always having to work. How you get there is up to you. In this short blog I want to share some basic financial stuff I think everyone should know, no matter where you're starting from.

When it comes to money, we're mostly left to figure things out ourselves - it's rarely taught at school, at home, or at work. The internet has lots of resources, which is great but can also be confusing. The ideas I'm sharing here are things I've used in my own journey. I'm not an expert, just someone who's learned a bit from books and other resources. So, let's get started.

Define your Goal

Everyone has some kind of dream or goal they want to achieve one day - and that includes financial goals. Maybe you want to become a millionaire, maybe you just want to earn enough to live freely without stressing about money, or maybe it's something in between.

Whatever your goal is, the important thing is to define it clearly. Ask yourself:

• What is my financial goal?
• When do I want to achieve it?
• What steps do I need to take to get there?
• Is this goal realistic?

Having a clear, specific goal - with a number and a timeline - gives you direction and makes it way easier to plan and stay motivated. It's not about chasing money for the sake of it, but about knowing what "financial freedom" really means for you.

Know your Numbers

How much are you actually spending every month? Do you know the exact numbers off the top of your head? Most people don't - and that's totally fine. But if you ask them, they will often guess a number that's far off from the actual amount.

That's why it's important to have at least a rough idea of how much you spend each month and where that money goes. Knowing your actual expenses helps you understand how much you need to live comfortably, which is useful for the next steps.

To figure this out, try tracking all your expenses and income in a "household account book" for the next three months. You can do this on paper or digitally - whatever works best for you. After that, calculate the average, and you'll have a clear picture of your monthly living costs.

Know your net-worth

Where do you stand right now? How much do you need to earn to hit your goal? Know your net-worth: your assets (bank balances, investments, useful insurance, collectibles, valuables) minus your debts/liabilities (loans, credit cards, mortgage). Checking this once a year helps you see progress.

The Important Fund

Once you have a rough idea of your monthly expenses, use that to set up your emergency fund. This is the cushion for unexpected costs - think of it as money you don't touch unless something urgent happens.

Quick rule: take your monthly living amount and multiply it by about 3-6. A common target is 3-4 months' expenses. Keep that money in a separate account and only use it for real emergencies.

The emergency fund should be filled up before you start investing.

3 account model

Most people use one bank account for everything - subscriptions, bills, groceries, and fun. That works, but once you start saving and investing it's handy to split things up. A simple 3-account setup:

• Salary and spending account - day-to-day money
• Emergency account - your emergency fund
• Asset account - for investing (ETFs, stocks, etc.)

Budget Rules

There are a lot of budgeting rules on the internet that can help you stay organized. A famous one is the 50/30/20 rule:

• 50% goes to your needs (bills, groceries, etc.)
• 30% goes to your wants (vacations, event tickets, other discretionary spending)
• 20% goes to your savings (high-yield savings accounts, emergency fund, etc.)

This gives you a simple way to split your money across categories. I even built a little website I use every month. I probably have too many accounts (some are unnecessary) - one for recurring bills, one for fun, one for online shopping, and one for daily expenses where I drop a set amount each month. You can get a bit carried away with accounts, but whatever works for you.

Savings

Opinions about savings vary. Many people view saving as a necessity while others do not. You've probably heard the saying "save money and you will be rich," which isn't strictly true. Generally, you might save for a specific reason such as a car or a vacation. While that mindset is fine, you should also save even without a specific reason - for example, 20% of income as suggested by the budgeting rule.

Once your emergency fund is filled, consider automating transfers to an additional savings account each month. Keeping savings in a separate account (possibly alongside your emergency fund) can give you peace of mind.

Investing

While savings can grow in a high-yield account, investing is another way to grow your assets faster. You can start with small amounts (for example €10 monthly). You can invest in many things including stocks - proof of ownership of a fractional percentage of a company. Stocks can be a good starting point but should be considered in light of your overall financial situation.

There are also ETFs (exchange-traded funds), which are often a good go-to if you want to start investing without getting too deep into individual stock selection. Stocks give you control over which companies you own, but they lack diversification. ETFs offer broad diversification, which can reduce risk. Some benefits of ETFs:

• They are cheap - fees when buying ETFs are generally low
• They are diversified
• They are suited for many investors
• They are liquid - can be bought and sold during market hours

Like every investment, ETFs also carry risks such as:

• Encouraging gambling - because they are liquid, some people may be tempted to trade frequently
• Market risk - you can still lose money; investments fluctuate in value

Compound interest effect

Compound interest is powerful. If you invest €100 at 5% a year, you get €5 the first year. Reinvest that and next year you're earning interest on €105, and so on. Over time that adds up - that's why starting early helps.

Dealing with debts

There are good debts, which allow you to invest in your future (education, for example), and bad debts, which finance things that lose value in the long term (such as a car bought on credit). In many cases, personal debts tend to be the latter. It's important to get rid of bad debts as soon as possible. How can you deal with them?

• Analyze - Start by listing all your debts. You can sort them by interest rate (high to low) and note each monthly payment.
• Utilize lump-sum payments - Make larger payments when you can. Some banks allow extra payments without penalty, which helps reduce interest paid over time. If you get a bonus at work, consider using it to reduce your debts.
• Stay debt free - Once your debts are paid, try to avoid falling back into debt.

The Mindset

Getting money is one thing. Keeping it is another.

Planning is important, but the most important part of every plan is planning for the plan not going according to plan.

Man in the car paradox: People seek wealth to be admired, but others don't admire them - they just want the same admiration for themselves.

Wealth is just the accumulated leftovers after you spend what you take in.

Avoid the extreme ends of financial planning.

People often take cues from others who are playing a different game - define the game you are playing.

Become OK with a lot of things going wrong.

Finally

I hope you learned something useful and can try a few things in your daily life. The ideas here come mostly from The Psychology of Money and a German book called Das einzige Buch, das Du über Finanzen lesen solltest. Till next time :)