Six surprisingly simple steps that will help you achieve Money Confidence

How do your start your journey towards Money Confidence?

I often get the question "but how do I actually start?". In today’s newsletter, we discuss the general plan of approach for everyone towards Money Confidence.

Everyone's financial situation is personal and unique, so your decisions will depend on your situation and your preferences.

Still, I believe that, no matter your money situation, these steps provide clear guidance and help you in deciding in “what to do next”.

Before we start

Today is going to be the first time (of many) that we talk about investing. With it, has to come a mandatory disclaimer. As always, the information I provide is sourced from both reputable sources and my own experiences. I intend to inform you about the financial world and help you make better decisions, but none of the information in this email should be taken as financial advice or advice to purchase certain financial products. See our full disclaimer here.

Spending less than you earn

Money is a deeply personal topic. We all spend it differently. Maybe you save with ease and are left with a lot of money each month. Great!

But… most of us don’t. Many of us struggle to not spend all the money we earn in a month, and make it to the next pay-check.

Let’s see what happens if we live above our means? We certainly don’t want that, as that means each month, more money goes out than in. We end up with no money left, or we have to go in debt. This is basically stealing money from Future-You.

Then, let’s say we spend every month exactly as much as we earn. Living from pay-check to pay-check, this is what many people are doing.

But what happens when something unexpected happens and you suddenly are faced with a large bill? And how can you ever save up for fun trips, a house, your dreams, your retirement and your children’s future? All of those cost (a lot of money).

It is clear then, that we need to at least spend less money than we earn (duh!).

We can of course do this by increasing our income (see the previous two newsletters) or by spending less (we will discuss this in a later newsletter).

Once you manage to spend less than you earn each month, here’s the MoneyMinds Plan:

1. Fund a basic emergency fund of €2467

You need an emergency fund!

You’re almost out of clean clothes. As you drag your dirt laundry to your washing machine, load up the machine and press “start”, disaster strikes. It won’t start, no matter what you do. A mechanic will have to come to fix it, or you’ll have to replace it altogether.

As you’re googling for the phone number of a mechanic, you hear your letterbox rattle. A blue envelope falls onto your floor. It’s from the tax man. Apparently, you still owe the government a hefty sum for last year’s income tax. Yikes!

The next day, you get up from the dentist’s chair. Your teeth are in great shape again, but it wasn’t cheap. Another bill to add to the pile. How will you pay for all of these expenses, that just seem to come out of nowhere?

The above situation might seem a bit drastic, but the truth is that quite often in life, we’re confronted by bills we didn’t see coming. An emergency fund protects you against the stress that such a situation might bring.

Whatever happens, you’ll always have some money ready to deal with sudden expenses.

It’s not only for sudden expenses, but also could serve as a buffer to bridge a period of unemployment or allow you to stay in a hotel for a couple of days if there’s really no other option.

An emergency fund is a must for everybody and it should be your highest priority once you manage to spend less than you earn.

Why €2467?

A study published in 2019 showed that have a basic emergency fund of $2467 was enough for 95% of people when sudden expenses hit them.

The euro amount would be almost the same because, at time of writing, the euro and dollar are almost the same in exchange rate.

The height of the basic emergency fund further depends on the cost of living in your country. In The Netherlands, the average net income is €2834, while in all of the EU the average is €847. You can see average net incomes per country in the image below.

Note: while the Wikipedia article cites credible sources, be sure to take the numbers here with a slight grain of salt.

Another way to look at it is through the Cost of Living index. In The Netherlands, we have about 99% of the costs for average goods compared to the US. So turning the dollar amount into Euros should be an okay enough comparison.

More on income and cost of living in a later newsletter.

The researchers stated that you shouldn’t pick one month’s income as the required number, as especially for lower incomes the costs would most likely be higher than that. With that in mind, an emergency fund of €1500-€2500 in Europe should be good.

And of course the height of the required emergency fund goes up as inflation goes up, too.

2. Pay off high-interest rate debt (anything that’s more than ±6%)

This step is more relevant in the U.S. than in Europe, as credit cards and student loans with a high interest percentage are more common in the states.

Still, you might have a credit card debt, pay for purchases in monthly instalments, have a pay day loan or any other high % debt.

Paying a high percentage of interest is costing you a lot of money, and the longer you don’t pay back the debt, the more interest you’ll pay over time. Prioritise paying back this debt before doing anything else!

For example, credit card loans often carry interest rates over 12%! At 12% you’re paying 1% a month. If you have a €1000 in credit card loans, this means you have to save €10 EXTRA every month just to fight off the additional interest. There is no higher guaranteed return than paying these loans off.

Done? Great! Let's see the next step

3. Build your Full Emergency Fund

Now that your high interest rate debt is taken care off, it’s time to further fill your basic emergency fund and expand it.

Experts differ in opinion about how large your Full Emergency Fund should be. The rule of thumb that most adhere to is 3-6 months of living expenses. So, if you spend a €1000 a month on average, that means anywhere between €3000 to €6000.

It also depends on your personal preference and how much makes you feel comfortable. Keep in mind how stable your job is here as well.

If you’re let’s say a teacher, you’re probably very sought after in the job market, as most countries currently face a shortage. So, if you lose your job, it might be easier for you to find a new one, then it might be for a freelancer who depends on clients coming through with projects.

You can alter the desired height of your emergency fund based on your job security and personal preferences.

For me personally, I aim to have at least €5000 in a savings account as my emergency fund at the moment.

Your emergency fund gives you peace of mind and let’s you sleep well at night. That might be one of the best things money can buy.

In my mind having enough money means having the freedom to do what you want, and who doesn’t want that?

Having a fully funded emergency fund is a required before advancing to the next step!

4. Start investing - time to make your money grow

So far, we’ve taken care of nasty debt and built a nice, comfortable safety net.

Now, it’s time to start thinking about using the money we don’t immediately need to grow, so we can enjoy this surplus in the future!

Investing is a topic that’s been written and talked about A LOT. There are many different types of investments to be made. The stock market, crypto, real estate, commodities and much more. In the coming weeks and months, I’ll help you make sense of it all.

For now, just see it as putting money away for a while, and after waiting long enough and braving the ups and downs, hopefully walking away with more than you’ve put in.

The main thing to know about investing is that it requires A LOT OF PATIENCE. Of course, you should never invest what you can’t afford to lose. But, more specifically, you should invest money you won’t need for at least the next 10-15 years. The longer, the better.

Because your investments will go up and down over time, you want to avoid at all costs a situation where you need to take your money out at a ‘shitty’ moment, like right after the market has crashed.

This is where the fully funded emergency fund comes in! It protects you from being forced to sell your investments when life is giving you more lemons than expected.

Next week, we’ll talk more about investing.

Types of investment accounts

There are generally speaking two types of investment accounts you can open. A regular one and a “tax sheltered retirement account”. Let’s have a look

1. The retirement account

While the laws and specifics differ per country, most of them will have retirement investing accounts. In these accounts you can invest money that you’ll use as a pension when you retire. Most of the time, this is being done for you by a pension fund through your employer.

If you’re self-employed, or don’t get a pension through your employer, you can open a retirement account.

The benefit of this is that the money you invest there will be seen as pension, not as your personal wealth. Your income tax will then be lowered, so it’s a great way of paying less taxes but still building wealth.

The downside is that you’re generally not allowed to take the money out before you retire (at the ripe age of 67 - or later!). The tax benefit comes at the disadvantage of not being able to touch your money, just as you’re not able to touch your pension.

If your goal is to quit earlier than the retirement age, be sure to first make sure you can quit at all at a normal retirement age!

In some countries your employers offers a matched a contribution (matching the amount you put into your retirement account), so if yours does, take advantage of this.

The lock up also serves as an extra protection to not pull out during a down turn, which can be safeguard for beginning investors.

2. The regular investing account

The benefit here is that you can take the money out at any time, but the downside is that you will pay taxes over your investment value. The amount and types differs per country.

We’ll discuss taxes later.

But, how much should I invest? And what should I invest in? More on that next week.

5. [Optional] Pay off lower-interest rate debt

If you have other debts, that have a low interest rate, you can choose to pay them off.

For example a mortgage isn’t typically as painful in % as a credit card debt, but is still worth paying off consistently. Not only does the monthly interest payment become lower each month, but the house you live in become more and more “yours” instead of the bank’s.

The main benefit of this is peace of mind, which is definitely something your money should create for you.

You might have student debt. Depending on the country, this can be a high or low interest rate. Here in The Netherlands, it is around 0%. This means that you’re not paying any extra interest, you’re just paying back what you loaned over time. Personally, I wouldn’t pay it off faster than needed, because your money can do better compounding for you.

However, if you feel stressed about the debt, that’s an OKAY reason to start paying it off (faster).

Getting a mortgage is also much harder with existing debt in place, so that would be another reason to pay back earlier.

Important note: This is only true for loans that cannot suddenly be asked to repay instantly. A mortgage or the student loans (here in The Netherlands, and in many countries) cannot be suddenly asked to repaid if you keep up with the payments. Furthermore, there are reasonable policies if you do fall behind.

If you have a loan that can be called at the discretion of whom you borrowed from, it is highly worth considering to pay it back earlier.

If you get called on the loan in a down market you will be forced to sell your investment at a bad time! As we learned earlier, you want to avoid this at all costs!!

6. Pursue other big saving and investing goals!

If you made it here, you’ve got the MoneyMinds Plan down to a tee! Now you just need to keep saving and investing. And ideally keep earning more too.

Think about your goals in the short, medium and long term.

In later newsletters we’ll dive into setting personal goals and such.

If you book a personal coaching session, we can also help you with making a personal plan!

Recap

1. Fund a basic emergency fund of €2467

2. Pay off high-interest rate debt (anything that’s more than ±6%)

3. Build your Full Emergency Fund

4. Start investing - time to make your money grow

5. [Optional] Pay off lower-interest rate debt

6. Pursue other big saving and investing goals!

Hopefully today's email will give you a good sense of where to start. As always, please share your thoughts with me by replying.

Thank you so much to all of you that take time out of your busy Monday to read this email and those that let me know their feedback.

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We'll talk again next week!