Today, we want to delve into a truly exciting topic — the Fixed Costs Analysis. Personally, I consider this analysis to be the cornerstone of your financial possibilities.
The interesting thing about my job is that when I meet new people privately, and they somehow learn about my activities, two scenarios often emerge.
The first scenario is that I am consciously avoided because people have a guilty conscience or discomfort regarding their own finances, and they desperately want to avoid this topic.
The second scenario is that I engage in discussions with people who have obtained their knowledge from financial pornography or so-called “stock market gurus,” and if I don’t share their views, I’m out of the conversation.
Nevertheless, one thing often strikes me in these situations. When I do manage to get into the conversation and ask about the values, like how much money is available for investments, I receive the same answer about 98% of the time.
Uh, I don’t know, just a rough estimate.
My next question is then:
What are your fixed costs as a percentage of your income?
Unfortunately, I usually get the same answer, which is quite puzzling to me. Because only when you know your real numbers do you know your actual current assets or the maximum amount you can spend per month.
I am aware that in our country, there is a mentality that one should not talk about money. I personally think this is the wrong approach because open communication, especially about money, can lead to clear situations. However, many people don’t even talk to themselves about money. If they did, they would thoroughly question expenses or upcoming investments and compare them to their financial possibilities.
In this regard, my grandfather always used to say, “If you don’t understand how to save, you don’t understand how to handle money.” That’s why I consider it my duty to communicate this simple and accessible tool, which is essential for everyone.
Before I go any further, I want to share some numbers to emphasize the urgency of this task.
As of October 1, 2022, Germany had an over-indebtedness rate of approximately 8.48%. This means that about 5.88 million adults over the age of 18 are over-indebted and have sustained payment difficulties. Around 3.59 million of these over-indebted individuals are men. This means that approximately 10.56% of men over 18 years old in Germany can be considered over-indebted and, at least, having sustained payment difficulties.
The average debt amount is around €32,600.
For those who are interested in this topic, you can find more information in the 2022 Debt Atlas of Germany.
So, let’s rank the reasons for over-indebtedness.
Unemployment, failed self-employment, separation (20.2%)
Illness, addiction, accidents leading to the inability to work (17%)
Inefficient household management (13.5%)
It’s noteworthy that inefficient household management is already the third most common reason for over-indebtedness. What does this mean? It means that due to neglecting one’s finances, one gets into trouble because they spend more money than they earn.
Eliminating this point is possible for everyone if they take the time and effort to consciously consider their own finances, especially fixed costs.
I am always amazed when I work with clients, and they are shocked after we work on a financial plan together because they had expected different numbers. Often, I find excessive expenses in the form of too many insurance policies, unnecessary magazine subscriptions, fees for unused gyms that haven’t been canceled, and even multiple, expensive mobile phone contracts because one always needs the latest phone. There are also old electricity and gas contracts, as well as overpriced car insurance, overdrafts, and various other expenses.
Creating a list of your fixed costs is actually quite simple and not at all complicated. It might take you 1–2 hours the first time to create an Excel file with your expenses and income. Enter your monthly costs point by point, and break down annual costs into monthly ones to get a real monthly burden.
You should end up with the actual monthly fixed costs value. Here’s a tip: take responsibility for your finances and be honest with yourself. If you enter estimated numbers instead of the real ones, you’re only harming yourself. Find the relevant contracts or bank statements and enter the real numbers. It’s also a good idea to have a separate column for contract numbers/contacts and a note on whether it’s a monthly or annual expense.
Are there various amounts you’re not familiar with? For example, living expenses, hairdresser, cosmetics, fuel, and car maintenance, etc. Then ask for receipts or invoices for all your purchases in the future, collect them, and evaluate them at the end of the month. Sometimes, you’ll be surprised at how much you spend unconsciously. Include these amounts as “estimated values” in your monthly column in the file.
Here’s a nice example: I once advised a couple to record every daily expense in a little red notebook for a month. When we analyzed it at the end of the month, they realized they were spending over €230 per month on coffee to go — that’s over €2,700 per year just on coffee. Respect! This is why I emphasize the importance of an honest fixed cost analysis as the foundation of your finances.
If you don’t have Excel, you can use a traditional household ledger, a notebook, or a sheet of paper to work out your fixed costs.
If you’ve used a program, print out the created file and file it in your new “Finances” folder. Set a reminder on your phone once a month to review the analysis for accuracy and completeness — it might take just 5 minutes of your time.
Perhaps you’ve received notifications from your gas or electricity provider that costs are increasing. The insurance company has informed you that you’re eligible for a better no-claims bonus, etc. You’ll need to update these changes in your fixed costs list regularly to stay up to date.
If you’ve created everything, and there’s a surplus at the bottom, congratulations — that’s a good basis with potential for wealth building.
If you’ve created the file, and there’s a deficit, congratulations here too — you now have the potential to optimize your finances and turn a negative into a positive.
In both cases, whether in surplus or deficit, you can’t earn money as quickly in terms of the effort invested in optimizing fixed costs.
So, ask yourself consciously:
Do I really need all these insurances, the expensive mobile phone contract, the large apartment, the expensive car, the daily coffee to go, lunch in the canteen or at a restaurant, etc.?
Especially with phone contracts or insurance, a call to the provider often results in a significantly more attractive offer if you mention that you want to cancel. Look for ways to reduce your fixed costs, especially in the face of the current inflation rate and rising costs — you need a countermeasure in terms of savings.
Honestly, imagine that you also enjoy saving money, and yet you still get the same service from your provider. That can motivate and make you proud. Believe me, the feeling of having control over your finances is a very nice, reassuring feeling that you won’t want to miss.
And if you also have money left for saving consciously, and you see your bank balance increase month by month or have the opportunity to pay off debts, you’ll realize that saving can also bring fun and joy.
I will cover possible automated account systems, savings rates, and a suitable money mindset in future blog posts.
So, to reiterate:
Take this to heart, sit down with your finances, and take personal responsibility for your financial future. The sooner you understand your true financial possibilities, the greater your potential for saving and investing.
If you have any questions about this, feel free to write to me, and I will do my best to respond as quickly as possible.
I wish you much success in creating a wealthier life.
Best regards, Klaus Sagwitz