Low salary help needed [Europe]

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Topic Author
serman
Posts: 4
Joined: Tue Feb 19, 2019 5:25 pm

Low salary help needed [Europe]

Post by serman » Tue Feb 19, 2019 5:34 pm

Hello,

I am 29 years old and new to investing.

My situation is as follows:

Currency: EUR
Inherited 1.000.000 in European bank
I have around 80k cash in home country bank (Euro)

No Real estate holdings. I pay rent

Salary: 20k per year
Spendings: ~22k per year

Planning to quit job and try a new business by my own with a little capital ~10k so future income is unpredictable.
Planning to have a kid in the next 5 years and move to a bigger house so spendings after 5 years will rise to ~40k/year.

According to IPS and the bogleheads general philosophy, you need to save one x of your income each year. In my case, I can not save income because wages in my country and my industry are low and as a businessman I will start from 0 and I do not know when and if I can store any of my salary in an annual basis.

So, having about 22k/yr and 40k/yr as a standar expenditure without knowing my future income, how do you propose to manage the €1,080,000?

In general i feel condifent in these allocation emergency funds(25%)/investments(75%)

Thank you in advance everybody.

User avatar
Watty
Posts: 17067
Joined: Wed Oct 10, 2007 3:55 pm

Re: Low salary help needed [Europe]

Post by Watty » Tue Feb 19, 2019 7:05 pm

serman wrote:
Tue Feb 19, 2019 5:34 pm
According to IPS and the bogleheads general philosophy, you need to save one x of your income each year.
I'm not sure what you mean by that. There is a wiki on the Bogleheads philosophy.

https://www.bogleheads.org/wiki/Boglehe ... philosophy
serman wrote:
Tue Feb 19, 2019 5:34 pm
Planning to quit job and try a new business by my own with a little capital ~10k so future income is unpredictable.
Some people do well running their own business but a lot of small businesses fail within a short time so without knowing your situation it would be hard to know how risky that would be.

Have you considered if using some of the inherited money to get some training to increase your skills would be a better alternative than trying to start a business?

Topic Author
serman
Posts: 4
Joined: Tue Feb 19, 2019 5:25 pm

Re: Low salary help needed [Europe]

Post by serman » Wed Feb 20, 2019 6:08 pm

Watty thank you for your reply!
Watty wrote:
Tue Feb 19, 2019 7:05 pm
serman wrote:
Tue Feb 19, 2019 5:34 pm
According to IPS and the bogleheads general philosophy, you need to save one x of your income each year.
I'm not sure what you mean by that. There is a wiki on the Bogleheads philosophy.

https://www.bogleheads.org/wiki/Boglehe ... philosophy
serman wrote:
Tue Feb 19, 2019 5:34 pm
Planning to quit job and try a new business by my own with a little capital ~10k so future income is unpredictable.
Some people do well running their own business but a lot of small businesses fail within a short time so without knowing your situation it would be hard to know how risky that would be.

Have you considered if using some of the inherited money to get some training to increase your skills would be a better alternative than trying to start a business?
In the link you have sent me, the second principle of bogleheads philosophy is to "invest early and often".
Often means for example, invest 15% of your monthly income, but in my case this seems impactable at the moment because of my low salary.
So the question is: Is there any proper strategy to invest in the long run this 1m given that probably I will have to take money from my investments instead of boosting them?

I live in Romania where the taxes for a company are good and my profession is around digital marketing. I prefer to start an online business because i have much more opportunities to have a bigger salary than an employee, at least i believe i can make the money i am already getting paid.

Regards

TroyMcClure
Posts: 87
Joined: Sun Aug 31, 2014 6:13 am
Location: Germany

Re: Low salary help needed [Europe]

Post by TroyMcClure » Thu Feb 21, 2019 9:06 am

This is an unusual situation for sure: you spend more than you earn, yet still manage to have 80k in savings, and you are now a millionaire. I'm not asking for justification or more details, I'm just saying this raised my eyebrows!

I'd have a couple of questions or remarks on what you've written:
serman wrote:
Tue Feb 19, 2019 5:34 pm
In general i feel condifent in these allocation emergency funds(25%)/investments(75%)
An emergency fund is normally seen as directly available cash expressed as a multiple of monthly expenses, most people setting it at 6 to 12 months of expenses. In your case that'd be somewhere between 11k to 22k EUR. Instead you seem to be suggesting that 250k of that million EUR should constitute your emergency fund which is completely out of proportion. Or do you mean to say that you would like to keep 25% of your financial assets as cash? It's not the same thing, it might look the same but if you're tempted to tap the quarter million for living expenses it is not the same as keeping cash as an asset to cushion ups and downs of stock when looking at your entire financial assets.
With that amount of money, and the expenses you have, you should basically have 95+% invested, with cash deposits as possible assets within these investments.
If you mean to say you would like 25% of cash-like assets and 75% stock, that would be appropriate if you don't mind some fluctuation on your portfolio, which is probably reasonable at 29 years of age.
serman wrote:
Salary: 20k per year
Spendings: ~22k per year

Planning to quit job and try a new business by my own with a little capital ~10k so future income is unpredictable.
Planning to have a kid in the next 5 years and move to a bigger house so spendings after 5 years will rise to ~40k/year.
You're already losing money, you're planning on increasing your losses, and you want to quit your job. That just doesn't compute. I understand you've just been given a lot of money but that doesn't make you an entrepreneur.
The sensible thing to do in my opinion, especially as a digital marketer, is to start your business on the side, whilst keeping your current job. That way you can see if you're actually able to develop a business before leaving everything behind.
Or you look for a different job with a better pay, but once again increasing your losses doesn't seem like a great idea, especially at the age of 29. You have a lot of money in the bank but don't burn through it right away...
serman wrote: In the link you have sent me, the second principle of bogleheads philosophy is to "invest early and often".
Often means for example, invest 15% of your monthly income, but in my case this seems impactable at the moment because of my low salary.
So the question is: Is there any proper strategy to invest in the long run this 1m given that probably I will have to take money from my investments instead of boosting them?
You should also perhaps look at it the other way around: your expenses are way too high compared to your salary. Of course you are in a unique position because obviously you've had "external" money that explains the 1.08m EUR.
15% of your monthly income would be fine as a starting point. You wouldn't be able to retire anytime soon but that'd be something already. But in your case it makes absolutely no sense for two reasons:
- with your salary and expenses you are not a saver, you're a loss-maker, so forget about 15% savings making a small impact.
- you're a millionaire

To answer your question, if I were in your shoes I would keep 1 year of expenses in cash in a bank account to serve as emergency fund. I would invest the whole of the rest in 70% stock (via index funds or ETF) and 30% bonds or cash assets (cash deposits, short-term government bonds as index funds or ETFs), possibly cost averaging. I would make sure that the index funds or ETFs distribute dividends (not accumulating). I would keep being an employee, whilst side-hustling to check whether I can make it on my own, and to keep health benefits. I keep lifestyle creep in check.
The sum of my salary as an employee + dividends from the funds has a positive cash flow that helps me boost my investments.
Eventually and if all goes well in a few years my side business produces an income that allows me to quit my day job.

Topic Author
serman
Posts: 4
Joined: Tue Feb 19, 2019 5:25 pm

Re: Low salary help needed [Europe]

Post by serman » Fri Feb 22, 2019 6:49 am

TroyMcClure wrote:
Thu Feb 21, 2019 9:06 am
This is an unusual situation for sure: you spend more than you earn, yet still manage to have 80k in savings, and you are now a millionaire. I'm not asking for justification or more details, I'm just saying this raised my eyebrows!
Dear Troy thank you for your reply. Please let me explain.
I earned those 80k on a university competition. As for spending more than I am earning, I don't believe 2k per year will make a big difference in my retirement. On the other hand, spending 2k per year now from my savings give me the opportunity to live in a bigger house and have a better quality of life. I hope this makes sense

TroyMcClure wrote:
Thu Feb 21, 2019 9:06 am
An emergency fund is normally seen as directly available cash expressed as a multiple of monthly expenses, most people setting it at 6 to 12 months of expenses. In your case that'd be somewhere between 11k to 22k EUR. Instead you seem to be suggesting that 250k of that million EUR should constitute your emergency fund which is completely out of proportion. Or do you mean to say that you would like to keep 25% of your financial assets as cash? It's not the same thing, it might look the same but if you're tempted to tap the quarter million for living expenses it is not the same as keeping cash as an asset to cushion ups and downs of stock when looking at your entire financial assets.
With that amount of money, and the expenses you have, you should basically have 95+% invested, with cash deposits as possible assets within these investments.
If you mean to say you would like 25% of cash-like assets and 75% stock, that would be appropriate if you don't mind some fluctuation on your portfolio, which is probably reasonable at 29 years of age.
Sorry for not explaining that appropriately. I would like to keep 25% of my financial assets as cash, not as an emergency fund.

TroyMcClure wrote:
Thu Feb 21, 2019 9:06 am
To answer your question, if I were in your shoes I would keep 1 year of expenses in cash in a bank account to serve as an emergency fund. I would invest the whole of the rest in 70% stock (via index funds or ETF) and 30% bonds or cash assets (cash deposits, short-term government bonds as index funds or ETFs), possibly cost averaging. I would make sure that the index funds or ETFs distribute dividends (not accumulating). I would keep being an employee, whilst side-hustling to check whether I can make it on my own, and to keep health benefits. I keep lifestyle creep in check.
The sum of my salary as an employee + dividends from the funds has a positive cash flow that helps me boost my investments.
Eventually and if all goes well in a few years my side business produces an income that allows me to quit my day job.

Do you have any recommendation for cash deposits and short-term government bonds?
Side hustling is the way to go, I will definitely try it! :)

TroyMcClure
Posts: 87
Joined: Sun Aug 31, 2014 6:13 am
Location: Germany

Re: Low salary help needed [Europe]

Post by TroyMcClure » Fri Feb 22, 2019 7:53 am

serman wrote:
Fri Feb 22, 2019 6:49 am
As for spending more than I am earning, I don't believe 2k per year will make a big difference in my retirement. On the other hand, spending 2k per year now from my savings give me the opportunity to live in a bigger house and have a better quality of life. I hope this makes sense
As I said I wasn't challenging you, and of course with a million EUR in the bank 2k EUR deficit a year isn't that material. But I guess my message was that if one has a tendency to spend more than one earns, one will run out of money eventually. Some people will always spend more than they can afford even when they increase their income, I'm not saying you are in this category but again some people can burn through a million EUR quickly. Hence my remarks about watching out for lifestyle creep.
serman wrote:
Fri Feb 22, 2019 6:49 am
Do you have any recommendation for cash deposits and short-term government bonds?
I don't know how things look like in Romania, but in Germany where I live pretty much any bank will have cash deposit options, likely with durations from 6 months to 8 years and rates that probably won't exceed 0.3% or so. Maybe there will be some offers advertised at 1% but usually they have a very limited timeframe of say 1-6 months before they revert to the low 0.x%. Anyway you'll have to do your research for what's available in Romania, a good place to start is aggregator websites, comparison websites and consumer association reviews. Remember such deposits are insured up to 100k EUR only, so you'll likely want to spread your deposits over several banks. Personally, considering the interest rates I don't even bother with cash deposits. I keep my emergency fund in a savings account with 0.0x%, and use bond funds for the rest. Of course you can also argue bonds aren't exactly attractive at the moment, especially in Europe, and decide to not bother with bonds and count on guaranteed cash deposits instead: also perfectly sensible.
I use an iShares 3-5years EU government bonds fund (ticker IBGX where I buy it) and a global gov inflation-linked bonds fund with a maturity ~7 years, mine accumulates (ticker IGIL or IUS5 where I buy it) but there is a distributing version also (ticker GILE).

CarpeDiem22
Posts: 209
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Re: Low salary help needed [Europe]

Post by CarpeDiem22 » Fri Feb 22, 2019 10:39 am

I'm sorry, but this raises alarm bells for me.

1. Relative to USA, I agree salaries are low in Romania but so are the expenses. Spending 22k EUR in Romania is equivalent to spending 51.4k USD in US in PPP terms.

2. Plan for an absolute amount of expenditure is something I never understand. What if you end up spending only 15k in 11 months. The last month you'll force yourself to spend 7k to get to 22k expenditure for the year?

I don't mean to be rude, just giving you some food for thought.

Coming to your actual question regarding management of 1.08 mn EUR, I think your 75/25 allocation should be ok if that is the risk you think you can take.

andrew99999
Posts: 462
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Re: Low salary help needed [Europe]

Post by andrew99999 » Fri Feb 22, 2019 11:32 am

CarpeDiem22 wrote:
Fri Feb 22, 2019 10:39 am
2. Plan for an absolute amount of expenditure is something I never understand. What if you end up spending only 15k in 11 months. The last month you'll force yourself to spend 7k to get to 22k expenditure for the year?
Without an idea of expenditure, how exactly is retirement planning possible and what is your suggested alternative?
PassiveInvestingAustralia.com

User avatar
Watty
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Re: Low salary help needed [Europe]

Post by Watty » Fri Feb 22, 2019 11:45 am

TroyMcClure wrote:
Thu Feb 21, 2019 9:06 am
The sensible thing to do in my opinion, especially as a digital marketer, is to start your business on the side, whilst keeping your current job. That way you can see if you're actually able to develop a business before leaving everything behind.
I agree. Romania only has a population of about 20 million people so it may be hard to earn a living doing digital marketing there. In addition there may also be other people who have a head start there.

What does housing cost where you live? For example what type of property could you buy for 100,000 to 200,000 EUR?

What I am thinking is if you could buy a nice home for modest amount that might help lower your expenses and help you not need to spend down your inheritance.

ICH
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Re: Low salary help needed [Europe]

Post by ICH » Fri Feb 22, 2019 12:26 pm

It takes a lot of courage to have 1mil euros in a European bank nowadays. Maybe consider splitting it to different banks in different countries to be below the deposit guarantees. At least temporarily until you finalize your plan.

I would diversify in the following:
1. Invest in myself (maybe a masters degree or other courses)
2. Invest in Real Estate (rentals)
3. Invest in a low cost portfolio of world stock-bonds index ETFs
4. Invest in small businesses (mine or somebody else's)

TravelGeek
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Re: Low salary help needed [Europe]

Post by TravelGeek » Fri Feb 22, 2019 12:39 pm

Watty wrote:
Fri Feb 22, 2019 11:45 am
Romania only has a population of about 20 million people so it may be hard to earn a living doing digital marketing there.
You need to look at the larger EU market (and beyond). For many US and western EU companies Romania is a source of skilled lower-cost human resources.

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Kitty Telltales
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Location: In the middle of the EU sometimes Florida

Re: Low salary help needed [Europe]

Post by Kitty Telltales » Fri Feb 22, 2019 1:10 pm

Congratulations!! Also read the Wiki on Windfalls.

ICH and TroyMcClure are giving you sound advice above. I would also use Global Stock and Bond Index Funds. Also investment in your own education, and your partner’s, is critical.

I am wondering if you are thinking about buying your own apartment or house, or do you already own? Do you feel settled in the city where you are now living?

The 25% you want in an emergency fund could be 50,000-75,000 Euro (2 years income) plus the roof over your head, your own house or apartment. You could give your “dream” a shot and in 2 years, see if it works out. At your age, you can take that risk. You will learn quite a lot that will lead to more successes.

I’ve been self-employed most of my life and I know that owning my own home, without debt during most of those years, gave me the freedom to make other choices concerning my work. I’ve just read that homeownship is quite high in Romania. Many would disagree in that I invested so much of my capital in my home rather then putting it to work in the market and could develop lots of charts showing just how much I could have made if I didn’t invest in my homes. All I know is that it worked for me.

CarpeDiem22
Posts: 209
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Re: Low salary help needed [Europe]

Post by CarpeDiem22 » Sat Feb 23, 2019 8:25 am

andrew99999 wrote:
Fri Feb 22, 2019 11:32 am
CarpeDiem22 wrote:
Fri Feb 22, 2019 10:39 am
2. Plan for an absolute amount of expenditure is something I never understand. What if you end up spending only 15k in 11 months. The last month you'll force yourself to spend 7k to get to 22k expenditure for the year?
Without an idea of expenditure, how exactly is retirement planning possible and what is your suggested alternative?
What I meant was: Because 22k was spent this year, not necessarily 22k will be spent next year, especially with a negative P&L. There should be room to cut. That's all I meant. I am part of the financial planning team at my organisation and I just got done with unit-wise financial plan/targets for about 25 units with separate P&Ls for the next fiscal year (Apr to Mar in my location). I can tell you, any plan with a negative P&L (excluding newly started operations) was not appreciated, no matter how strong the balance sheet was. And from a financial controller point of view, certainty in expenditure but uncertain income is always risky. My suggested alternative: Given that the OPs expenditure is about 60% higher than per capita income in Romania, there should be some room to cut. As the saying goes, "Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery."

Disclaimer to OP: I have no entrepreneurship background and don't have even 10% of your net worth.

Topic Author
serman
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Joined: Tue Feb 19, 2019 5:25 pm

Re: Low salary help needed [Europe]

Post by serman » Thu Feb 28, 2019 12:30 pm

Hi there!

First of all, thank you for your responses. :)

Regarding your questions, my expenses are higher than my income because I support my partner as well who has a part-time job and she is underpaid.
We rent a flat in Bucharest and the idea of buying a house is good, however, the prices are rising the last 2 years so it's not the perfect timing to buy property now unless a very good offer occurs.

As for my allocation, I would like to help me with some thoughts I have:
1) If I invest 750k, would it be wise to invest them all through one platform? Ex (IB,Degiro)? Or do you suggest a split?
2) As i mentioned, 1m is in euro and i would like to keep that currency. Which accumulating etf's do you suggest assuming a 70/30 allocation? I would like to keep it simple..

andrew99999
Posts: 462
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Re: Low salary help needed [Europe]

Post by andrew99999 » Thu Feb 28, 2019 9:38 pm

serman wrote:
Thu Feb 28, 2019 12:30 pm
2) As i mentioned, 1m is in euro and i would like to keep that currency. Which accumulating etf's do you suggest assuming a 70/30 allocation? I would like to keep it simple..
If you are buying equities, it doesn't matter what the currency the fund reports in. You are buying the same underlying assets, only the ruler you are using to measure it changes as the currencies fluctuate.

If you want to hedge your currency to reduce some upside currency risk, then a home country bias or regional bias or currency hedged fund can be useful. There are costs these (concentration risk or cost of hedging), but there is also a costs to not doing it (currency risk, long term home economy upside risk). It's a big topic to get your head around though and there is no simple answer, but for me it is worth it to learn it to reduce major risks.
A good starting point is a cap-weighted all world index anyway, and as you get older and move towards retirement, you would expect to have a higher portion of fixed income to equities and since they should be in home currency, you would naturally be reducing your currency risk on that side.
PassiveInvestingAustralia.com

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