Tracking my expenses

Yes, I do not (yet) track my expenses. I know how important it is but since I was pretty happy with our savings rate (around 60%) and my husband was not a fan of tracking expenses I decided there was no point in doing it myself.

Luckily, nowadays banks do this for you since they categorize your expenses automatically. You just need to make sure it is the right category and categorize a few when the bank does not have information on the correct category of a specific expense. The only thing you have to do is try to use your card always, if possible. If it is not possible and you need to cash out, which in our case it is only to pay the cleaning lady and some lunches/coffees, it is fine. So, I managed to convince my husband and we will track our expenses from today onwards!

This graph below is my idea of how I currently spend my money. In one month, I will compare it with how I actually spend my money.

expenses

Keep posted, I will keep you updated on my real expenses and on my first month as a real estate investor. I have learned so much in this process of buying a house for short-term rental and hiring a management company and I will share all the tricks and tips that worked for me!

Advertisements

An image worth more than a thousand words

The Eurostoxx 50 and the S&P 500 have historically been fairly correlated. However, since 2009/2010 we clearly see them splitting, as Europe is rather stable and the US presents amazing returns.

Index fund investing as a simple strategy is more complex than what John C. Bogle says. There are too many options to choose from. For investing in Europe I am confident that ishares is the best, do you have any other suggestion?

Naturally many other factors have to be taken into account when deciding what to do in terms of investment, in particular which index funds to buy. But, as we know, there is no point in thinking too much about an investment strategy; even financial experts rarely beat the market. So, would you say there will be a crash soon in the US? Shall we invest in the EuroStoxx? Let me know your views!

A hungry man is not a free man

Most of the people spend all their life driven by others’ expectations or by extrinsic motivation, as Dan Pink very accurately described in his book Drive: The surprising truth about that motivated us. It basically means we spend our lives looking for approval in the society mostly through money and/or recognition at work. However, this only gives us a temporary boost of motivation/satisfaction/happiness. The permanent happiness is found in the intrinsic motivation which, according to Dan Pink, relies on three principles: Autonomy, Purpose and Mastery.

My personal journey to financial freedom is actually part of a bigger journey to autonomy, to finding purpose and to having time to master all the issues I have always been interested in. However, I have to admit that the short-term focus is extrinsic, that currently I am focused on making money, not for the purpose of consumption, which is used by mostly for people as a way to fell that they belong to a certain social status, but for the purpose of saving, of being free from every-day bills. As Adlai Stevenson very wisely said A hungry man is not a free man. Therefore, only when free from obligation we can be free to enjoy life at its fullest.

Starting investing: my strategy

With more than 100k in the bank account, we have decided it is about time to start creating passive income. Real Estate is our first bet. Rich dad poor dad was probably the book than mostly drove me towards this journey of reaching financial independence and I am following some of the rules I learnt there, while adding some of our own knowledge about the real estate market in Portugal.

  • Invest in a market that you know

Portugal is definitely the way to go. We are from the 2 biggest cities in the country and we truly think that investing in the center of a city there is a safe bet. Prices are high but due to the limited space and to the increasing investment Portugal has done in previous years in transportation, which makes living in the center, without a car, possible and valued. More and more Portuguese value being close to work, supermarkets, restaurants and the possibility to move around easily to other places on the city. It is actually a European trend but it has started late in my country. It is important to know your market, not only because you need to analyse the legal contracts, but also to easily understand the taxes to pay and know the best areas to invest in.

  • Analyse the trends but do not buy an apartment exclusively based on one trend

Tourism in Portugal is increasing very significantly. Renting an apartment through AirBnB is highly profitable and many old buildings are being totally rebuilt for that purpose. Naturally, tourists pay more to stay in the city center and prefer to stay in what we can call typical apartments, i.e., not necessarily big but with national characteristics. This is what we are aiming for in the medium-turn, as the rate of return is quite high. However, we are aware that in a few years this trend may not be as strong, in addition to the fact that supply of houses is actually increasing, which may led to a decrease in prices charged per night in the future. This is why we will invest in a studio in the city centre, which can easily then be rented to students or young couples who do not have kids yet.

  • Do not aim for cheap/low-rent investment

You can always buy a cheap apartment, ask for a low rent and still make a profit. I have to tell you, it is risky, there is a high chance you have an empty apartment for some months, tenants who may not pay, more issues with the construction and neighbours. You do not have to aim for high-end but be aware that the low-end can be very costly.

We will invest 95k in a new 40 sqm studio in the city centre, next to the metro, train and near many supermarkets/restaurants/bars. For your information, check below our expected, but slightly conservative, annual returns on this investment, based on the total cost of the apartment, i.e., including all the costs, such as taxes and furniture in the initial price.

Total cost 101,085
House price 95,000
Registration costs 375
Taxes 1710
Furniture 4000
Long-term rent AirBnB
Annual return 5.03% Annual return 7.64%
Total profit/year 5080 Total profit/year 7720
Average profit/month 423 Average profit/month 643
Months occupied 12 Months occupied 12
Monthly rent 500
Apartment costs/monthly 25 Price/night 60
House insurance/annual 100 Occupation rate 67%
Annual taxes 520 Property manager rate 30%
Monthly expenses 120
Apartment costs/monthly 25
House insurance/annual 100
Annual taxes 520

Risks/concerns:

  • Apartment is not yet totally built – it will be in December – and there can be a delay in construction, which would mean a few more months without earnings. Not very likely though as we have visited the apartment a few weeks ago and it seemed quite advanced. The only risk here is the government licence, which can only be granted after construction and may delay the process.
  • I am not a technical expert; therefore I cannot predict the problems we might have with the construction, where we will have leaking or other issues. I hope not!
  • Construction company going bankrupt. Very low risk as they have other buildings in the city, apart from being property managers of some of them. Also, they are very exposed, very active on social network. But it is still a risk!

To diminish the risks, I have talked to a lawyer to analyse the situation and to make sure there is nothing wrong with the legal contract. Additionally, I did an extensive analysis on the evolution of the real estate market and try to be realistic/towards the pessimistic side with my assumptions. I have also investigated the construction company because they are rather new in the market. But I have realized the risks are rather low and a passive investment which yields, just on passive income, i.e., without taking into account the possible valuation of the asset, which I believe might increase in value, between 5% and 7.6% is a rather good investment.

How did I save the money I currently own?

Most of the money I currently own was saved during the last 1.5 years. 2 years ago, me and my husband started looking for high(er) paying jobs outside our home country, which is a low-paying/low-opportunities country, and we actually found a job more or less at the same time but unfortunately in different countries. M went to Switzerland and I came to Germany. The good thing was that we actually were quite close, if you consider 5:30 hours by train or 1:30 flying close. At the end, we got used to it and we saw each other every weekend, either in one of the places or other places, as we took the opportunity to get to know other cities nearby and countries. I have realized what a beautiful country Switzerland is and I got to know many other cities in Germany, Austria and Poland. Yes, we could have saved more but your relationship is definitely more important than the savings rate, so I have decided to save on other things:

– Renting an unfurnished and cheap studio
Luckily my employer paid for all my furniture transportation from Portugal and therefore I could find a cheaper apartment as unfurnished apartments are generally cheaper. The studio was maybe a bit small for 2 but for 1 person it was more than enough.

– I bought a bike and I did not spend money on car/taxis/metro
I am lucky to live in Frankfurt, which is a very safe and relatively small city and that allows me to bike everywhere. I have saved not only 70 Euros a month, which normally people pay for monthly public transportation pass, but also I hardly ever took a cab. In addition, only in exceptional situations, i.e., if it is raining a lot, I take the metro. Currently, I am 4 months pregnant and I plan to bike everywhere until I feel good, hopefully till the end of my pregnancy! I did not and do not plan to buy a car, even though everyone tries to convince me cars are very cheap in Germany and I should do it. I did not fall into the trap of buying a car and having huge costs and worries every month. Not only you have to pay parking, taxes, insurance but also devaluation is a huge cost. If we need a car, which is very rarely, we can easily rent it for around 20/30 euros a day.

– I was always paying attention to cheap ways to get to Switzerland or other places to visit
I was always checking the cheapest way to travel, either by train or flying, not only to see my husband but also to visit my family back in Portugal. For Christmas and other high demand periods, I always bought the tickets at least 6 months in advance.

– I did not change my lifestyle
My salary increased by almost 4 times than what I was previously earning in Portugal. Germany is a relatively cheap country, only slightly more expensive than my home country. There is a huge temptation to change your lifestyle, i.e., buy expensive clothes, expensive furniture, go to fancy places and not to be careful about money in general. However, apart from travelling more often and buying a good bike (1 000 Euros), I did not change my habits. I still hardly ever buy clothes, I always have lunch in my canteen, go for dinner not more than once a week and hardly ever to expensive places. Most important of all, all the expensive things I bought/experienced I have regarded them as what they are – a luxury – and did not allow them to take any role in my habits. I did experience Michelin star restaurants but actually my favorite place to have dinner in Frankfurt is still the Moroccan place around the corner, where you pay 10 Euros per person and the food is amazing! I just did it for the experience, which is valuable for me, the same way I went skiing and did a biking competition of 110km, all of those are somehow expensive, but again, the most important thing is not to make them a part of your habits and regard it as an experience. On a normal weekend, we go biking around Frankfurt and we bring lunch and water with us, which makes it an almost free activity. And I love it!

Rules to follow

1 – Look for a high paying job and save at least 50% of your salary

Yes, you need to work. Especially if you have no money saved. Not only you need a stable influx of money to start saving but also it is important for you to understand how society works; focusing on improving your social and technical skills, which will be highly important once you reach financial independence. Try to find a good compromise between working hours and pay but, honestly, from my point of view, there is no way you can build financial freedom if you do not have a high paying job. Look for a job that pays well, preferably in a city that is not expensive. I had to leave my beautiful low salary country to start my journey to financial freedom in Germany. Even though I was not very excited about moving in to Frankfurt at first, I have actually been positively surprised by the city in many aspects. Not only it was easy for my husband to come here and to also find a high paying job, I have managed to visit many places around Europe and I have learnt how much I love biking.

2 – Do not discuss or try to justify your financial decisions to others

In general, people feel they are taking the best financial decisions that can possibly be taken. However, remember that 99% of those people will work their ass off until they are 65 or more. Everyone is trying to convince you to buy instead of renting your current house? Nobody understands how you are saving/investing money while at the same time renting a house? Do not waste your energy trying to explain because 1) they will not understand and 2) it takes a long time to explain people the hidden costs and the lack of flexibility in owning a house, so you will be wasting your time too. Focus on your plan and accept the fact that, while most of the people would love to be financial independent at the age of 40, nobody wants to think strategically on how to reach it and especially are not willing to make any effort. Yes, you are alone!

3 – Treat yourself and others with compassion

Do not aim for perfection. Have a rational plan and stick to it 90% of the time. If one month due to whatever circumstances you end up not saving what you had expected – or not saving at all – do not blame yourself. Those are sunk costs and, again, do not waste your time or energy with guilt. This lifestyle is like a diet, yes, you will reach your destination sooner or later and yes, cheat days are allowed from time to time.

We, humans, have this natural tendency to compare ourselves with others. Try to be as smart as your neighbor, as interesting as your friend, feeling envy in a positive way, and do not try to strive with material goods. Feel compassion for those who do it. Unless they are Warren Buffet, they will never be 100% fulfilled. All the latest studies on happiness show that wealth is irrelevant so feel compassion for those who feel they can only achieve happiness with material goods.

4 – Make 2 lists: one with all the things that are highly valuable to you and another one with all the things that you would have more time to do more if you didn’t have a full-time job (some overlap of course)

Here are my lists:

Highly valuable/make me happy

  • Biking
  • Spending time with my husband (and, in the very near future, my son)
  • Learning/reading about psychology and economics
  • Writing
  • Being there in important steps of my family/friend’s lives
  • Doing something for others
  • Have an experience on starting a start-up full time
  • Be an example for my son and show him that being free is more important than being super wealthy, that taking care of himself/his health and happiness are more important than working for others
  • Doing yoga and understanding its benefits for the human body
  • Feeling I own my time

This I would love to do more if I wold have time

  • Surprising my husband more often and write about my feelings
  • Cooking
  • Read and write more
  • Learn German
  • Volunteer
  • Do more yoga
  • Be more mindful