December, 2018 Net Worth Update and Year End Review

UPDATE: I made a mistake when I initially posted this. In my spreadsheet, I double counted one of our credit card liabilities. We were still down for the month, but not quite as much as I originally wrote here. The updated numbers are $37,014.97 and €32,497.78 respectively. I'll leave the post as-is though since from a high level it remains correct.

Our net worth dropped in December to $36,153.59 or €31,741.52. That's a one month change of about -4.75%.

Since the majority of whatever wealth we have is in the form of stocks, we were hit hard by the sell-off in equities. Anyone paying attention to the markets this past month would have seen the kind of fast paced elevator down that market pundits have been scaring us about for years. Our savings rate didn't spare us from the damage.

We're still well up from a year ago though, and that's the perspective I want to keep in mind. Equities are for long-terms positions. I'm not a trader, and month to month moves whether up or down can only cause heartbreak if you get too emotionally invested in them.

This month had a few novel transactions worth mentioning. I got my Christmas bonus, which I always appreciate. At the same time, we had to pay our estimated taxes to the German government for the fourth quarter, so it was basically a wash. We also received a bit of Christmas money from relatives and a larger sum from a relative specifically earmarked to support a hobby of my wife's.

Year-End Review

So how'd we do this year? Our net worth is up around 33% in dollars from one year ago. That's entirely savings-rate based since our equity positions have been all over the place. As that net worth number grows, any year over year growth is going to come increasingly from investment performance.

Investment Performance

And my investment performance this year was bad at a YTD drop of 13% (I'm only considering my taxable brokerage account). Some of it was just the way the markets moved. For people following the US markets, it was a volatile year with big drops in February and then the last months of the year, but if you were invested in just about anything outside of the US, ho ho ho, you had a rough year.

How could I have known that at the exact moment I'd begin investing in German companies, it was at the peak of the German market? I began buying in October 2017, and this chart is the daily chart of the DAX from the past year:

It's actually uncanny how some of my German purchases happened at the exact tops of their cycles. The companies seemed cheap when I bought them, and they seem cheaper now, but that doesn't mean anything in the near term. The German companies were a drag on my performance over the whole year, even when I was doing well in other parts of the portfolio.

Some of the bad performance was from me trying things and discovering I don't have the temperament for them. I tried shorting some stocks, and I tried day-trading a few times. They're not my thing, and I'll avoid those activities in the future. Doing either triggers too much adrenaline and fear in me. Regardless of investment performance, I just don't want to live like that.

I also changed investment strategies in the middle of the year. I did a lot of backtesting and research to come up with a reasonable strategy, and I implemented it. I'm trying to control risk as best I can with smart position sizing and clear sell rules, but I do recognize that this strategy can be extremely volatile. As we get older, I have some ideas for how to reduce risk further within this current strategy, but for now, I'm being aggressive within my rules.

Recognizing my previous mistakes, I wrote a long document explaining the strategy and the rules. I've already referred to this document at times when I doubted my current approach, which makes this one of the best decisions I've made all year money-wise.

Savings

For our savings, we were somewhere around 25%. It's not exceptional, but it's not horrible either. I'd like to get this number up in 2019, but there are some genuinely life-improving expenses that may need to take priority if they become a possibility.

In 2018, the big overarching expenses were our rent as well as a trip we took to the US. Moving doesn't feel worth it. Rents are going up in Germany, and by staying put, we get to keep our rent stable while prices rise around us. I've looked at smaller apartments in our neighborhood, and their prices are approaching ours despite their smaller size. We could move further away, but our life satisfaction would plunge. Plus, my wife doesn't want to move, and neither do I.

After deliberation, I am going to the US this summer. I bought tickets using credit card points, and my wife and I will take our trips separately. I'm not thrilled about that entirely, to be honest, but the cost savings are enormous to having more focused trips back rather than larger multi-family tours. She can also work while I'm in the US and vice versa, so there's less opportunity cost.

We saved a bit on our tax preparation costs too. There are some tax people recommended to expats like us who speak English, but ouch they can charge a lot. They're very good, so don't get me wrong, but at some point you have to ask if what you're getting is worth the unusually high price. In our case, we were getting our taxes back in two weeks (fast) and we could communicate in English. But we speak German, so why not find someone less expensive who's good enough?

We could also do our own taxes, but for now I'm more comfortable with a professional in Germany on our side, and I'll keep doing my own US tax return.

So there's a wrap-up of the year for this abroad saver. I've learned a lot this year, and here's hoping for a more effective and smarter 2019. Cheers and have a happy new year.

Margin

I sold some positions yesterday in my brokerage account. They passed my selling rules and on the whole I made a small profit with those positions, but I wouldn't have sold them except I wanted to close out my use of margin.

I used margin in my brokerage for the past year, and although my timing was shit, and its use probably amplified the loss I'm sitting on now, the loss isn't what bothered me about it. Instead, it was the mental games it played with me that forced me finally to shut it down.

Dangerous Thinking and Actions

I don't write this blog to give anyone else advice. I'm not a money professional, and I don't want anyone to think my word is correct or actionable. But I do want to point out a few of the dangerous lines of thinking and risks that margin use exposed me to, and maybe someone else will find this helpful.

Careless Security Selection

When it's borrowed money, I found it easier to buy stuff that I otherwise might not have bought. It was easier to say, I'll buy a bit more here on this pullback. I'll buy this security just 'cause. The dividend is higher than the interest I'd be paying. I'll day-trade just this once... twice... three times....

Looking at some of the stuff I'm still holding, all of that thinking was stupid. I have stuff I shouldn't have bought. I took risks that were unnecessary. I'm sitting on losses that will take several years to recover from. It's not the end of the world, but it was a mistake.

Constant Desire to Close Out my Margin Use

This is more stressful than financially destructive, but I thought a lot about my margin use, and I was always itching to sell to close it out. That's just stressful, and I don't want to live my life worrying about that. And speaking of stress...

Constant Need to Check the Portfolio

Because I was using margin, there was always the risk of a margin call. I never borrowed all that much, but the possibility was always there, and so I told myself I needed to regularly check the portfolio.

Well, if you constantly checked your portfolio this past year, you were probably pretty stressed out by it with all the volatility. Checking the portfolio probably contributed to some of the buying and selling that I regret in the past year because I got worried about a big crash wiping me out.

Playing Russian Roulette with Risk

As Nassim Taleb says, some risks are like playing Russian roulette with a gun that has hundreds of chambers. The likelihood of the bullet going off is low, and because it doesn't go off, you forget that there's a bullet in the gun.

I backtested the percentage of margin that I used, and the margin call bullet never went off in my tests. But it doesn't mean that it couldn't have. Especially because so much trading is done by computers, there's always the possibility that something crazy happens that causes a major after hours fall in prices that triggers the margin call. Because my broker insta-liquidates once that point has been reached, there was always the possibility of being forced to sell at crazy low prices even if the prices quickly recover.

That's an unacceptable risk. Last June, my broker had a glitch and sent out an email to many of its customers that their maintenance margin limit had been reached and their portfolio was liquidated. I literally woke up to read this email, and I'll never forget that feeling. The first thoughts were how I was going to discuss this with my wife. Perhaps World War III had started while we were sleeping and the world market crashed.

Eventually, I figured out that it was a glitch, but the fact that it was even a possibility that I could have considered hasn't sat well with me since.

This is Hard Enough

I buy individual stocks, and that's hard enough. Some of them may go bankrupt. I've sold a few for losses, which sucks, but on the whole, I believe that the portfolio will march higher as a group, despite some individual losers.

But using margin exposes me to something else entirely. It exposes me to permanent loss of capital based on price swings alone. It exposes me to risk that takes me out of the game entirely. My wife and I earned and saved this money by sacrificing pleasure now for gains later, and taking permanent capital loss risk with that is stupid and foolish.

Some instruments, such as shorting or options use, force you to use some kind of margin. I don't want to say that no one should do those things because they're useful. I respect smart short sellers. I respect that people can figure out options and appreciate the kind of insurance they can provide a portfolio.

But I don't have to. No one has to do that kind of stuff because just buying securities at reasonable prices in reasonable amounts and holding is hard enough without worrying whether I get to be in the game another day.

Cash Flow Parasites

It's that time of the year when I'm looking back at how we spent our money, and I'm considering where it all went and how to improve things next year.

The various categories I use to budget our money does illuminate things a bit. For example our biggest expense by far is our rent plus Nebenkosten (a German term for the utilities managed by the landlord bundled into the monthly rent payment).

But beyond that, the picture becomes murkier. We have transportation costs and various utilities and our BLOW categories, but what's the glue holding that together?

I don't have a way to add this to the spreadsheet, but I'm now considering cash flow parasites as overarching spending concepts that bind several categories together. Basically, these are purchases that require other purchases over time. The initial purchase fits into the budget as a single item, but over time that initial purchase requires incremental purchases later. This is similar to lifetime cost of ownership, but it's broader.

For example, let's look at some parasites that we don't own. The most obvious example is a car. The car itself has an initial upfront cost, but there are the following obvious ongoing costs:

• Fuel
• Insurance
• Repairs
• Parking
• Registration
• If purchased with a loan, then the ongoing interest cost
• Asset depreciation

That stuff is obvious. Less obvious are the following:

• Environmental harm and contribution to air quality health problems
• Risk of accident
• Risk of regulation
• Legal risk from poor driving or impaired driving
• Risk of theft or vandalism
• Municipalities being forced to devote ever more space for automobile use
• Stress from traffic
• Overcommitment of time due to transportation flexibility
• Opportunity cost from higher amount of money in cash emergency fund to cover emergency car costs
• Opportunity cost from spent car money not invested in compounding assets
• Opportunity cost from saving the money in cash to buy the car

Whenever I think of buying a car, all this stuff pops into my head. I remember the stress of driving. I remember the major repairs. I remember the couple of accidents I was involved in (not at fault). And after considering all that, and despite the downsides of not having a car, I just can't justify buying one again.

A less high stakes example of a cash flow parasite is a television. We don't own one because a television contains the following costs:

• The television itself
• The devices attached to it
• The content played through it
• The furniture used to display it
• The floor space given over to it
• The electricity
• The time devoted to it and the feeling that it should be used due to the invested money (a kind of sunk cost fallacy)
• The ongoing maintenance and replacement/upgrading of attached devices
• The exposure to advertisements and societal propaganda that convinces us what's normal and how much money we should be spending to be like the beautiful people on TV

One reason we don't own these things is because of the high negative cash flow costs I associate with them. But that doesn't mean I don't have cash flow parasites, so where are they in our budget?

Cell phones are a big one. We use iPhones, so there was a substantial initial cost to them, which has been tolerable because of their ongoing use (we don't upgrade regularly, and I hand my model to my wife when I'm done with it). But there are ongoing negative cash flow associated with them:

• Cellular costs (contract-less month-to-month)
• App and content purchases
• Connective cloud services
• Time spent
• Internet at home
• Stress from being always connected
• Stress from the impulse to upgrade or buy companion devices
• Depreciation of the phone itself
• Exposure to what's "normal", similar to TV, but maybe even worse due to social networks functioning like a "keeping up with the Joneses" 24/7
• Maintenance (battery replacement, headphone replacement, charging cable replacement, screen repair, phone cases)
• Electricity
• Risk of theft

So what's the overall cost to it? That's really tricky. Some parasites have a clear overall cost, but some are more elusive or are shared with other cash flow parasites. I think the 30,000 foot view is probably enough to say that the costs over several years are substantial. There was a time before I had an iPhone and a time after it, and the costs before were zero since it was a whole different category of expenses. There was no parallel to what we have today.

At the same time, there are major upsides to having an iPhone. I'm just not sure that if I could get a full accounting of the exact cost that I would say they were worth that exact number. Using a smartphone means sort of stumbling into ongoing expenses, but I'm not sure how to back out of those at this point. Even if I use an iPhone for 7 years, that's still less phone-value than using a landline phone that costs maybe 30€ for potentially several decades. What exactly is the goal of having this thing? Sometimes it feels essential and sometimes it's like a casino in my pocket.

I've mentioned it before, but travel back to the US is a major expense, and it contains several categories within it. Flights and hotels are just the start when you start to look at all the costs associated with it. Most Americans don't make trans-Atlantic trips at all, but we do regularly because we live on the other side of it.

And then really, one has to look at the cost of being an expat itself. We make all sorts of spending choices that we wouldn't have to make if we lived back in the States. Right now, I think it's worth it for several big reasons, but I'm tempted to sit down and try and do a full accounting of what it's costing us to be here.

When looking at the cash flow parasites, it doesn't mean there's no value within them. Seeing our families is worth spending money. The phones do have major safety benefits and they allow easy access to a lot of free content. Living in Europe has major upsides. But I'm going to try and look at my choices much more holistically and see if there's some overarching concept that's causing me to spend a certain way.

November 2018 Net Worth Update

In November, our net worth rose about 5.25% to $37,962. In euros, it rose 5.7% to €33.417.The big factors that affected this number are as follows.

Stock Market

The stock market continued its volatility, and a number of individual companies I own fell by quite a lot. That's not fun to watch, but I have to content myself that the prices have fallen, and all future purchases are now going to matter more due to the lower purchase price.

I'm sitting on a net unrealized loss. That's mentally taxing, to put it mildly, but in addition to the above-listed consolation, I also spend a lot of time looking at past market corrections and how they affected the names that I'm holding. It feels painful now, but in a few years this will have been a blip in the movement of the stock markets. Even if this lasts a year, it is unlikely to be horrible.

I remember watching the 2015/2016 correction happening, and although it was exciting at the time, it now feels like nothing. When people talk about the long bull market, they rarely mention 2015/16, even though it was incredibly painful for a wide variety of stocks and industries. If you were holding commodity stocks, especially oil, you just got hammered. But that gets lost in the narrative of "the longest bull market in history".

Saving and a Gift

We saved a good amount this month (33.5% of income). Despite the stock market pain and despite my wife working fewer hours last month, our savings rate helped us inch upwards. We did get the electricity bill refund, so that basically eliminated our electricity costs for the month.

The biggest lever when you're talking about modest sums of money isn't the returns from investments but the total amount saved.

For transparency's sake, at the end of last month I received a monetary gift of $1000 out of the blue. I'm still uncertain as to why (other than that person loving me), but that money went straight to savings.

Economic Outpatient Care

The The Millionaire Next Door, Dr. Stanley spent a lot of time discussing "economic out-patient care". His basic idea was this: young people who receive a lot of monetary support from their familial elders often remain dependent on that support and develop bad habits that limit their future financial resourcefulness. He called that "weakening the weak".

Since learning of the concept, I've tried to be much more careful with such gifts. When I was much younger, I did develop bad habits from the knowledge that I had monetary help should I need it, and I'm trying to make up for past sins, so to speak.

Looking Ahead

December is a bit of a wild card. We have estimated taxes to pay, and we will eventually be billed for an extra payment for last year's German taxes. We also have a small trip to enjoy, which will cost some money, but I doubt we'll be extravagant.

Of course, there's always Christmas gifts, but we're modest gift givers, and we encourage modest gifts for ourselves as well. Because we live abroad, nobody expects anything too expensive or complicated, which does reduce expectations.

Unless the market really falls off a cliff, I expect further slow but steady progress.

Electricity Tracking

Unlike the U.S., we report our electricity usage once per year here. We pay a monthly fee that makes up part of a yearly estimated fee based on what's known about us. If we're over that estimated usage, we have to pay yet one more fee, and if we're under, we get a refund.

I find this system absolutely crazy, but there's nothing I can do about it. If you make a mistake one month, you're likely to make it year-round, and you won't have any sense of it until you get your final bill. It's a big delay, and the results can be terrible: you can be hit with an enormous final bill if you aren't careful.

The power company estimates for us much less than what's normal in the U.S. For me and my wife, our 2018 estimate was 2821 kWh for the year. The average in the U.S is 10,399 kWh for a residence.

Despite the difference in usage, we are incentivized to use very little electricity. There's no way around it: electricity is expensive here. For us, we're looking at a price of 0.22€-0.27€ per kWh, while in the U.S. it's 12¢. That's a major difference, and the kind of stuff that I found clever in the U.S. to keep my electricity bill low must now be standard procedure to avoid paying enormous electricity costs.

The first two years, we had to make an extra payment of roughly an extra month of electricity at the end of the billing cycle. That was irritating. For this year, I've kept better track of our usage, and if I understand the system at all, we should be getting a refund (taxes and fees are always a wild-card). Fingers crossed and thumbs pressed.

For our 2018 year, the electricity company estimated we'd use 2821 kWh. We ended up using 2331 kWh instead. I tracked this weekly and monthly in a spreadsheet (spreadsheets are a superpower), and when a weekly number jumped, I tried to look for reasons why.

Adjusting Usage: The Big Levers to Pull

There are a few levers we can pull to change electricity usage. Of course, there are the obvious ones like turning off lights, but we use LEDs for every bulb in the house. Lights aren't what drive our usage.

The big one is warming up water.

Our heating is provided via radiators and a building-wide central heating system. That's a different set of costs, and I won't get into that here other than to say that general home heating isn't included in our electricity costs. Instead, we heat water to:

• Bathe or otherwise wash ourselves.
• To cook or heat water for hot beverages.
• Wash clothes.
• Wash dishes.

The appliances associated with those activities are:

• The bathroom Durchlauferhitzer. A Durchlauferhitzer heats water on-demand as it passes by the heating elements. It's a nifty device, except that it chews through electricity. It's also a trap because you'll never run out of hot water in the shower.
• The kitchen's under-sink hot water resevoir. I just installed this, and despite storing hot water, it's not as big an electricity hog as the Durchlauferhitzer. That said, it supplies much less hot water since it's a small reservoir.
• The stove.
• The clothes washer, which is a front facing washer.
• The dishwasher.

The biggest and easiest lever here is the Durchlauferhitzer in the bathroom, which supplies the shower and the sink. Any period of time in which we deliberately shorten the amount of time the Durchlauferhitzer is heating water is a period where electricity usage will be noticeably lower.

After that, the easiest lever is the clothes washer. This machine allows us to set the temperature of the water very precisely, and if we set it to 0°, then the electricity usage is negligible.

Changing the stove usage is harder. By using the stove, we cut down on eating out, the cost of which easily can dwarf the electricity usage of the stove. However, there are strategic ways of using it to conserve electricity. By preparing a food in bulk (such as boiled potatoes or hard-boiled eggs or a big batch of TVP), you can eat the cooked foods over several days without resorting to the stove. We still use the stove for coffee and tea prep since we don't want to buy more expensive/more complicated preparation devices for those activities. But making food in bulk does have a noticeable effect on our usage numbers.

The dishwasher has a short cycle that does the job well enough if we prep the dishes well. Unfortunately, our sink is very small, so washing dishes by hand is perfectly possible, but it's a pain and often leads to a big countertop mess.

The Medium Levers

We also have a dryer, which we try to limit use of. It's a condenser-dryer rather than the standard American dryer with heating elements, and it's pretty efficient. Since our apartment has good cross breezes, we often use drying racks strategically placed where the air flows and where the sunlight falls. Now that it's getting to be winter, and therefore cold, dark, and damp, we'll probably use the dryer near-exclusively.

Our vacuum cleaner is surprisingly power hungry, and with our apartment's old electricity system, it often trips the fuse. It may be worth retiring this machine at some point, but we received it for free from friends when we first came here, so we'd need a super efficient machine to make the switch worth it.

Lastly, we have a fridge and freezer. The fridge was given to us, so again, we're not itching to get rid of it and buy something more efficient. We just try to keep the temperature down and keep some water in there. As for the freezer, we bought that a few years ago, and it doesn't consume too much power. We keep the freezer packed nearly 100% of the time since we rely on so much frozen food.

Misc. Power Sucks

We also have the following that we try to keep tabs on, but are much more minor electricity sucks:

• Laptops
• Cell phones
• A NAS and some HDs for computer backups (the NAS is admittedly a decadent solution for this challenge)
• Routers for internet access
• LED light bulbs
• Fans
• Electric power drill
• A+ rated range hood with LED light
• A HEPA air filter for the bedroom
• Blow dryer, clothes iron, sewing machine (used often enough to make them worth keeping, but not used often enough to cause a big spike in power usage)
• Electric piano
• Blender
• Electric dental things
• A rarely plugged in bluetooth speaker

These things will definitely suck power if we're not careful, but they're the least important in terms of the big picture of our power usage.

Electricity Eaters We Don't Have

We don't have an air conditioner. I've been tempted to buy one since heat waves in Germany are rough. But their electricity use would force us over our yearly estimate. For almost anyone, if you have and use an air conditioning unit, it's probably the biggest single lever you have to raise or reduce electricity use.

We don't have many small kitchen gadgets. I'll probably write more about our thinking here, but we don't have a microwave or a electric coffee maker or countertop water heater or any other variety of common small kitchen appliance. The exception is the blender.

We have no television nor any of the requisite co-gadgets that come with one. Any type of movie or TV show viewing happens on the laptops or phones. The computer speakers are mostly adequate for that. We wouldn't want to annoy our neighbors with a thumping sound system in any case.

And with that, there's a picture of our electricity usage. Here's hoping for that refund.

Net Worth: October 2018

Our net worth spreadsheet gets updated on the 26th of every month. I chose this date because it's deep enough into the month that we've likely made most of our payments for the month, so that whatever remains is the accumulated surplus. I could inflate the numbers by doing the calculations right after my pay period, but that seems self-defeating to me.

For October 2018, our combined total net worth was $36,070.18 or €31,612.78.

Composition

Since this is the first of these posts, I should describe what makes up our net worth spreadsheet.

There's a U.S. dollar section and a euro part. Each one contains the following:

• Bank accounts, including checking and savings accounts.
• Credit card accounts.
• Investment accounts (currently USD only).
• Loans and other lump-sum liabilities.
• An "Other" sections, which includes rounded petty cash as well as the estimated value of loyalty programs.

These are added together, and along with the prevailing EURUSD exchange rate, I calculate the value in dollars and euros. Since this spreadsheet has data from 2013, some accounts are closed, but the rows remain in the spreadsheet in order to maintain their data. Some things that aren't there that may eventually make an appearance are:

• Physical Assets. We currently don't have any physical assets that are worth adding to the spreadsheet (cars, houses).
• Pensions et al. I haven't added my pension from my German job. I haven't figured out a good way to do it yet. Likewise Social Security or the German Rentenversicherung.

This is a complete net worth spreadsheet and not a true FIRE net worth spreadsheet, but it's easy enough to calculate those numbers with a few clicks in the spreadsheet. Just Control/Command click the necessary accounts, and I'm good to go.

Up top, I have a couple of interpretations of the data in discrete cells. Namely, what is 4% of our worth? If it's lower than $40k, then it's shaded red, and if it's higher, then it's shaded green. It's definitely shaded red. I also have a sheet that calculates the Millionaire Next Door categories "Average Accumulator of Wealth" and "Prodigious Accumulator of Wealth" values for us and how much we're below/above those amounts. If our wealth is below the "Average Accumulator", it's also shaded red, which it definitely is right now.

Those two items are purely reminders of long-term goals and reminders just how much needs to be saved rather than being explicit thresholds.

Factors Affecting Current Net Worth

The biggest factors that affected this month's net worth change is the stock market. I'm a long only investor, and October has been pretty rough on us. Additionally, most of my portfolio is value stocks, and those prices have been getting crushed. The "growth" stocks also suffered but not nearly as much. I also have some positions in German companies, and Germany's stock market has been lagging for about a year.

Because of this volatility, my tax deferred retirement accounts and my taxable brokerage account fell several percent. We saved a good amount of money this month, but the market mostly netted the change to zero.

Funnily enough though, because the euro fell against the dollar, the value of these accounts rose in value in euros, even as they fell in dollars. Silver lining?

This month, I began to calculate the estimated value of loyalty programs. I'm calculating the various points as being worth ¢1 a piece. It doesn't add a lot of value to net worth, but those points have some kind of value, so I'd might as well add them. I'm not sure if it's worth adding them in for past months, since it's such a small value (around $1k).

Regarding credit cards and loans, none of that costs us interest. We currently never carry a balance, and the one "loan" is an installment plan from a dentist that doesn't charge any interest. In the beginning of the spreadsheet, we did have interest-accumulating accounts due to student loans and the cost of moving abroad, but those are long gone.

So there's the first of hopefully many updates.

Getting Used to Market Drops

In the past week and a half, I've lost more money in the markets (nominally) than I ever have. I wasn't investing in 2000 or 2008, and I cashed out the few stocks I had in 2015 to help pay off the student loans before that year's turbulence hit. Right now, I'm sitting on a large net loss that I predict will become larger.

With the fall yesterday, the S&P 500 looks like it will close below the ten-month moving average. This is a fairly rare event, and it's one of those possible triggers for trend-following people to close their positions and wait things out. I'm not going to do that, but I am and have been girding myself emotionally for the potential of a big drawdown.

I don't really feel any panic about this. Maybe I'm fooling myself, and if there's a 50% drawdown, I could conceivably panic. But I suspect I won't.

Tempered by past panics

In the past year, my tolerance for big drops has improved. I had my first taste about a year ago when one of my large holdings dropped by 16% in a day and then kept falling. I panic sold, and the holding eventually recovered, much to my chagrin.

After that I held more doggedly through big drops and was rewarded. I hated holding, but I did it, and one big draw down became a big winner, which I sold for a profit when the price appreciation looked too good to be true.

And then 2018 came, and suddenly big drops for some names didn't recover. Currently, I'm sitting on some securities that are very much drawn down, and the speed with which their plummets happened feels a bit punitive. When I described how one holding has fallen 40% since April on no real news, a friend laughed and said, "It's because God hates you."

But there's also something irrational about the plummets. Many of them are falling not because of their current actual performance but because of fears of future performance or fears of their markets being encroached by newer technology players. Fair enough. But the penalties in many of these cases are extremely pessimistic, and extreme pessimism can equal good value opportunities if the world doesn't fall apart. Which is admittedly a big "if" right now.

Backtests

One exercise that also helped gird me mentally was all the backtesting I did. There are some market drops that can be mostly avoided. The dot-com bubble was one such example. If you'd bought value at that point, you breezed through that basically unscathed.

Meanwhile, 2008 was a different beast altogether. If you're long-only, the only real way to dodge 2008 was to not be there. But if you weren't there in 2008, you probably weren't there in March 2009, and if you were there in March 2009, you were rewarded. Big time.

It's not easy. But it does show that the big drops are opportunities if you're buying. And they're also something to plan for.

Dreams of cheap prices

So there's a part of me that wants to see prices really fall. Like, c'mon lads, let's do this. Since I'm still earning money, I'd love for my future money to meet much lower prices. The CAPE ratio is still high, and if we think it has any predictive power at all, all of us who are buying securities right now should be praying for it to fall.

The only people who should be hoping for higher prices are those who aren't buying anymore or who are mega-rich. Higher prices don't help young people. Higher prices don't help savers. Think about how much you've already saved vs. what you will save in the future. Which number is bigger? If it's the latter, then you should want an 80% drawdown to happen (as long as you get to keep your job) because the compounding effects of that money will be so much greater.

So to wrap up, I've been training my brain to not get too distressed about this. There's some distress, not going to lie, but it's not panic, and if I'm not panicking now considering the amount of money I've lost, I doubt I'll panic later.

CC Award Update

We got the award.

In an earlier post, I expressed some reservations about these big awards and the minimum spend required to achieve them. I still feel that, and my wife still feels that. We did drastically reduce our planned expenses. We don't like feeling incentivized to make big purchases.

But I still wanted the award for reasons I'll explain later, so I found a method of manufactured spending to make it work. There aren't many available to us Americans abroad, but there are some, and I took advantage.

The manufactured spend did cost something as a percentage of the spend, so it wasn't free. Basically, it's a cost for the accumulation of these points. I think it's better than buying a bunch of expensive stuff totaling $4000.

Why do it at all though? The basic calculation in my head was something like this: we are going to travel to the United States again at some point in the next two years, so therefore it's worth spending a little, to save much more later. The return is pretty good in this case (around $70 spent to save between $600-$1000 later). Even if I later eat the annual fee, the return is decent.

The reality is that we're going to visit family in the US at some point. It's important to both of us, and despite any savings goals we have, it's not worth sacrificing relationships or missing seeing child relatives grow up. Next summer we'll suffice with FaceTime, but the next year we'll almost certainly be heading back.

Or we'll help relatives who aren't as financially well off come visit us. It is much cheaper for us to pay to fly someone here, than for both of us to fly to the US and find accommodation and transportation.

Will we do this again? Maybe. I'm looking at other card award possibilities, but the trouble with manufactured spending is that it's kind of skirting the rules. I prefer to draw as little attention to myself as possible regarding my American financial accounts, and manufactured spending can open me up to closer inspection. I might do this with another similar card and then focus on things like hotel cards that provide free nights automatically. Since hotel costs were a high proportion of our last visit, cutting down on that would be worthwhile.

Or maybe I won't. I could just continue to add points to this card that I have and otherwise use normal German payment methods to get by. Germany doesn't have the same glut of strategies that the US has, but it has a few, and those might be enough to both satisfy the points accumulating itch and to keep things simple.

Markets Fall Too

TLDR; Nothing to do in response to stock drops. I'm just going to stick to my plan and console myself that things just got cheaper.

It was unpleasant watching the market fall yesterday, and if it falls again today, that will also be unpleasant. Since I own individual companies instead of broad indexes, it was rough seeing every name take it on the chin. I own value and growth. I own a variety of sectors and industries. They all got pummeled.

What to do? Nothing. Just watch.

But I can remind myself of a few things to help make sure that I don't do something stupid.

This Could Already be Over

Yesterday could have been a one-off event, or maybe it's the start of a longer down trend. I actually have my doubts about that unless global trade really blows up, but more importantly, I don't know. If I sell today, thinking that this will go on, markets could recover, and I'd be feeling like a dummy.

Falling Prices Make Future Money Worth More

I will save more future money than the money that's already in my portfolio. It's no fun watching past dollars lose value, but if there's a larger drop, I can console myself knowing that my future dollars will buy more of asset than it could have had prices risen forever.

There's no position in my portfolio that's so large I couldn't see myself adding to it, and falling prices make it a lot easier to buy more.

Selling Stuff Makes Tax Headaches

More sales equal more paperwork. I want to save myself as much paperwork as possible.

There's a Reason I've Chosen My Strategies

There's a reason I have what I have. I've done a fair amount of backtesting and research, and while that's not perfect, it does give me some idea of what's possible on the downside as well as the upside.

All I have to do is not freak out. Just follow the plan and let time do most of the work.

So there you go. That's what I'm reminding myself as the heads babble on TV and Twitter and blame this or that for why the markets move as they do. I don't know what's going to happen. Neither do they. Stick to the plan.

My Money Mistakes: Student Loans

One of my early money mistakes was my student loans. Although they weren’t my first money mistake, they were definitely my first big mistake.

First, I chose a field in college that could easily be described as a “hopes and dreams” field. I don’t want to say what the major was, but let’s just say that taking out loans for it was dumb. For some salt in the wound, because I came from a relatively poor household, I got grants and scholarships high enough to cover the costs and living expenses of college. Let me repeat that: I got enough financial aid and merit scholarships to go to school for free, and I still took out student loans in addition.

You can see why I consider this my first big mistake.

Over the course of my undergrad years, I amassed a total of around $22,000 in student loans. I also took out some credit cards during that time and often carried a balance.

In the summer before my final year, it hit me that I was reaching the end of college, and that I had this giant debt and no idea what to do next. I know, I know. I listened to the Dave Ramsey show a bit today, and there are debts that are much greater than my $22k. Compared to someone who's amassed a $600k student loan sum, my amount sounds paltry. But that's also a danger of making comparisons like that: $22,000 is a lot of money for someone in his 20's who graduated with an impractical degree. In any case, it felt like a lot.

In my last year, I applied myself seriously at school. I'd been an OK student before, but in my last year I really tried. In so doing, I made contacts that would ultimately lead to real career advancement later. The loan amount climbed though as I took out my final loans for my undergrad years.

By the end, I had the previously quoted $22k debt. Around $1500 was in an unsubsidized loan, while the others were all subsidized. That was a bit of accidental good luck.

In the intervening years before moving abroad, I went to graduate school paid for with a teaching assistant position, and I did a variety of jobs, some of which were related to my field and some not. I consolidated all my student loans at a 7% interest rate right before the financial crisis caused interest rates to drop to basically nothing. I used tools like Upromise to shuttle extra pennies into the loans, and I used Sallie Mae's offers to lower the interest rate after a certain number of on-time payments and with automatic withdrawal.

The payment plan I'd selected meant that the payments were interest-only for a decade or something crazy. However, I tried making whatever extra payments I could to lower the principle enough that the scheduled payment amount would also take off at least some of the principle.

While I worked in graduate school, the loans went into subsidized deferment even though I was earning a very modest salary. I used that time to keep paying money into the loans, and left graduate school with a lower principle amount. I also opened my Roth IRA at that time.

I listened to Dave Ramsey and tried to get the "baby steps" thing going, but what ultimately got the loans paid off was two things:

• The habits and the desire to pay the loans off that built up while I was essentially broke.
• Getting a job that paid me a lot more money.

I would have eventually paid off the loans on my previous track, but it would have taken decades. I was dedicated though. All that was missing was the income to get the job done, and I got that moving to Germany. When I look at our net worth chart, I'm shocked at how quickly things changed once we had a steady situation. We went from a negative net worth of $23k when we moved here to a positive net worth of around $16k in two years.

I think there are a lot of warnings one can take away from this. The first: avoid debt. Just dodge the bullet, and you won't have to waste time trying to heal the wound.

The second: earning power is important. My degree was a silly degree to go into debt for. I don't regret the degree itself because my life is good, but I sat in negative net worth territory for too long, and a lot of my earned money went to interest payments. That's money that Sallie Mae gets to loan out now and earn income on.

Meanwhile, because my income was so low so often, I often had credit cards that needed to be taken care whenever I got enough money for debt-paydown times. I wanted to be done with the student loans, and looking back, I had periods where I intelligently managed my money, but lack of steady income plus debt equaled lots of squandered time as income came and went along with emergency funds.

The third lesson is that learning to live frugally is worthwhile from as early an age as possible. I got serious about saving money once I left school. I still made plenty of mistakes from that point, but I was beginning the saving practice in earnest then. If only that could have been shifted to when I was 16 and earning my first paychecks from my fast-food job. I had friends who already did have a savings mindset and who saved up thousands before leaving high school just from side jobs.

And the fourth I'll list is this: student loan debt can be paid off. You can get rid of it. You can do it pretty quickly too if you set your mind to it, earn enough, and spend it frugally. Just get it done and move on. When you make the final payment, you sadly won't get a screen full of balloons and a giant "Congratulations!", but it's something that you'll never have to worry about again.

Churning Isn't Worth it for Us

After talking with my wife, we're going to back off on the card churning/travel-hacking thing. When we spoke, she was totally in alignment with me and expressed similar concerns that I mention below.

Sometimes you have to just admit that something isn't worth it. We're trying to build a deep savings habit. Habits take time and effort, and credit card rewards disrupt the savings habit.

Encouraged Spending

I found myself looking for things to spend money on. If I'd ever had a thought floating in my mind soup about something I'd like to buy, I began telling myself that I'd planned buying it all along. Now was indeed the time to do it since we had the new card. That way I could get to the end of the process and say, "We only spent money we meant to," even though it probably wasn't true.

I want to think about ways of saving money rather than spending money, and I don't want to think that spending comes with big rewards. 

Expensive Thinking

I found myself angling for more expensive solutions than I'd otherwise accept in order to meet the minimum spend. Every purchase was anchored to the number $4000. I reserved a hotel for a lot more money than I would if I'd purchased it with my normal credit card. I looked at brand new high-end products when used or otherwise less expensive items would meet our needs.

Luxury Dependence

These high end credit cards are trying to get us used to the idea of luxury, and luxury is a weakness. Airport lounges, high-end hotels, first-class airplane tickets, speedy security checks, elite status, and metal cards are all nice, but they clearly want the card user to become accustomed and dependent on these niceties.

I don't want to feel like I'm entitled to that stuff. One day these cards might not be so generous with their perks, but the luxury dependance would likely remain. And then you're trapped. 

Points Aren't True Assets

Points are kind of like assets, but not really. The issuing company can change the rules whenever they want. The airlines can jack up their fuel surcharges. The points accumulate no income, and their value doesn't appreciate with time. As far as I can tell, there are no laws protecting you as a points holder.

If we spend a bunch of money now to get the bonus within the next month, we'd be spending today's money in order to save money potentially about a year from now. That's putting lot of faith that the points will be worth something then, and it's a lot of faith that the money that I could have saved today couldn't have been used in a better way. 

Stress

It was causing me stress, and that sucks. I don't want to resent my wife if she didn't put some spend on the card. I don't want my afternoon ruined if the card machine at the grocery store doesn't work. I don't want to call American banks more often than I usually have do, which for the past few years has been never. And I hated the buyer's remorse that came with buying expensive stuff.

I've always prided myself on avoiding unnecessary stress traps, and this project was becoming one. 

The moment where this really hit me is when I did our monthly net worth calculation, and I saw that it had dropped in a month where our stock performance beat the market. Additionally, I knew that it would continue to drop as we fulfilled the minimum spend over the next two months. Meanwhile, there were great deals in the stock market if only I could get some cash in to buy them. But no cash was coming. 

We got a couple awards from less ambitious cards, and maybe I'll do some of those in the future. But for the bigger cards, we just don't spend the kind of money that justifies trying to churn them. And to spend that money means forgoing buying real assets now that could be worth much more than the credit card points are next year. 

Anyway, that's my thinking. I'll write more about rewards and stuff, but for now, they're nice but not worth sacrificing real saving for. 

Post-Vacation Deprogramming

Since our last vacation, I've been going through bouts of thinking something was financially logical only to doubt myself. I mentioned before my ambivalence about credit card reward hacking, and that's continued. But moreover, I'm looking at all sorts of decisions before and since the vacation that are just puzzling, and I have to conclude that vacations of the modern variety are enormous mental and money traps if you're not exceedingly careful.

For example, social media is a vast reinforcement mechanism for what is normal and expected. Professionally and personally, I am surrounded by people who take fairly extravagant vacations and share them to social media. Moreover, the photography surrounding the vacations is rapidly improving, making personal vacations closely resemble advertisements.

As for advertisements, has anybody else noticed that YouTube can start to resemble ads for ads for ads? It's like ads all the way down. We watch ads before we watch our nicer more interesting ads. Whether it be for trailers, or makeup, or electronics, or just about anything else, it's easy to get sucked into a perpetual ad whirlpool.

Two realties that present real traps for me and my wife:

• We live far away from our broader families. 
• We live in the tourism capital of the world (Europe, broadly speaking). 

That makes taking some kind of vacation or extended travel somewhat inevitable. We can be careful, and we have been more careful in the past, but right now, I feel like something is off in my thinking and planning. 

Credit Card Award Beginner

Over the summer, while making several US trips, I managed to score a few credit card awards. These were the easy to achieve kind: spend $500 in three months and get back around $150.

In August, I might have bit off more than I can chew. I went for one of the big mid-tier cards that offer you a bunch of points for $4000 spend in three months. It has no foreign transaction fees, so I can stick a lot of our local transactions on the card. That's no problem.

But despite some lofty goals, I'm finding it hard to spend the money. First, there's a lag between being approved for the card and its arrival abroad. In that time, some spending has to happen just to eat, so that spend doesn't count towards the reward, though the clock had started ticking on the 90 days.

Second, there are few good options for manufactured spend in Germany. Those Visa cards you can load up in the U.S. don't really exist in the same way here. There's no Plastiq, so rent and a bunch of other bills happen directly from our normal bank account.

One of the rules I set for this project was to not spend extraneous money that we otherwise would not have spent. One the one hand, we haven't gone out and bought a bunch of crazy extra stuff. No new computers or cell phones.

The stuff we planned to buy that would have helped us cross the spending threshold keep getting cheaper the longer we plan. For example, we planned to put a bunch of next summer's U.S. trip on the card, but we determined that a trip would be too expensive, so we chucked that. We planned on buying a nice couch, but even with the reward, we find couches too expensive and keep finding acceptable couches at lower price points. We are taking a brief vacation on one of my long weekends, but with low-cost airlines in Europe, it just wasn't that expensive. And we planned on doing some nice-ish things for the apartment, but short of a full kitchen overhaul, we can't stand spending the money.

And some of the more outlandish ideas, such as buying a new iPhone, get snuffed out mentally before they have much gestation time.

On the other hand, we wouldn't have done even this amount of spending without the card, so it's encouraged us to open our wallets more than we otherwise would have. The couch we have is an eyesore, but it's functional. The apartment improvements could have waited. The small trip could have been even smaller.

I've been forced to update how we budget, which adds complication. It's much harder now to get a big picture idea of how well we're managing money since a budgeted item happens this month but the actual paying for it happens next month or later. I've developed some new systems, but what used to be simple is now more complex, and I believe complexity makes overspending more likely.

I keep coming back to one thing: the reward is worth between $600-$1000 depending on how well it's used. But if you don't spend any money at all, then such a reward pales in comparison to the value saved.

I've been going back to some of my favorite sources for financial inspiration, and some of my spending ideas feel more suspect. For example, I thought of front-loading our mobile prepaid amounts for the next year. But now I'm wondering if I even really need a mobile phone. I have some internet services that I use. I could prepay them... or I could cancel them and just keep the money.

I'm not certain if I'll do any of those things, but I'm considering it. So there's a kind of mental battle between my desire to try churning out of curiosity, my default frugal side, my radical frugal side that wants to move into a studio apartment and sell our furniture and use the library's internet, a certain amount of sunk cost fallacy lurking in the background, and my desire for the stuff we're going to buy.

I know an American family here that churns U.S. credit cards successfully, but I have no idea what their budget looks like, and I believe that they have willing helpers in the US who spend on the card on their behalf. I'm not so trusting as to give any of my family my credit card, so that avenue is not open to us.

At the very least, I doubt I'll do this again any time soon no matter how it turns out. It really doesn't appear practical for us.

Some US Expat Challenges

Before I moved out of the US, I didn't give much thought to the challenges of saving money and trying to build wealth. I was just happy to have a job, and I was happy that my wife accepted this new adventure.

But once here, it became increasingly clear that we Americans have challenges while living abroad that are unique to us. Here are some.

Filing Two Tax Returns

This is the big one. We Amis have to file both in our resident country as well as the US, and under certain circumstances we can owe taxes to both countries. There's no exit interview when you move abroad, so you just have to learn this on your own by reading the IRS website or by asking other expats. If you miss one or several returns, you're going to have a bunch of work to sort through to catch up, not to mention potential penalties.

As for the actual filing, you can use programs like TurboTax to file in the States, but TurboTax doesn't know everything. As soon as you move away from simply being an employee for a single employer earning under whatever the cutoff for the Foreign Earned Income Exclusion is, you enter a much more complicated tax situation. For example, being self-employed while resident abroad requires some familiarity with the treaties negotiated between the US and your resident country, if such a treaty exists.

U.S. Banks Probably Don't Want to Deal with You

You face an uncertain result if you tell your American bank back home that you've moved abroad. Many simply maintain an American address with a family member rather than take the risk of their bank closing their accounts. It's the same story with credit cards and investing accounts.

Foreign Banks May not Want to Deal with You

Because of the long arm of the U.S. government, foreign banks are required to disclose information about American account holders to the U.S. government. When opening an account abroad, you may be sent IRS Form W-9 from the foreign bank.

Many banks don't want the hassle, and they may simply refuse to give you an account because of it. When FATCA was passed, there were lots of stories of Americans losing access to banks and banking products. It's gotten better since then, but we always have to assume that it could happen again.

Floating Currencies and Conversion

Living abroad subjects you to currency risk. If you have any kind of financial life in the US, you will need dollars at some point, and you will then be hit with the reality of ever-shifting global currencies.

When my wife and I first moved here, the euro was worth around 1.38 dollars. In the first year, we tried just getting our lives together and didn't aggressively pay down the debts accrued to move here. Within around a year, the euro plunged in value, and suddenly we faced debts accrued in dollars becoming larger relative to our European incomes simply due to currency fluctuation.

On top of that, converting currencies costs money. If you use a service like XE Trade or Transferwise, they will charge you some kind of fee or make money by converting at a slightly disadvantageous rate. But they're much better than using a bank or one of those conversion kiosks.

Complex Rules for Investing

Once you've actually saved your money, it's unclear where to put it. Save it abroad or in the US? What kind of vehicle? Savings accounts pay basically nothing (especially in the eurozone), but when you look at equities you are entering a new world of complexity. Individual stocks or funds?  Real estate and rental income? You have to consider the taxation rules for both countries when making your decision, and you have to consider potential future changes to the law. What strategy is the lowest risk within this complex matrix of possibilities? I've made my own choices here (buying individual stocks rather than funds), but each person will have to make their own choices.

For example, buying funds as an American in Germany is really risky. If you buy funds in Germany, the US will tax them punitively. If you buy funds in the US, Germany taxes them less punitively than they used to, but I find the rules excessively complex and somewhat punitive.

Do You Speak the Language?

We are at risk, though this applies to everyone, when we don't speak the home country's language as well as everyone else. The fine print matters, and if you find English legalese tricky, it's only going to be trickier in a language you didn't spend speaking during your school years.

That list should give you an idea of what we're dealing with. In many ways, of course, we're very privileged. We chose to be abroad. We chose this country. At least in Germany, most Germans seem happy to have us living here.

But there are a lot of traps you can step in while living abroad. I'm still learning.

How Our Current Budget is Constructed

For the past few years, we've been using Google Sheets for our budget, and it's worked very well. The original idea came from Dave Ramsey's Total Money Makeover, but as with anything you work at over years, we've made it our own.

I'm in the process of doing some alterations, so I wanted to document how we're doing it now before I  take too many next steps away from the current system.

The basics are as follows:

• We use Google Sheets because it's easily shareable, it's extensible, and it's actually very feature-rich. Plus there are lots of people writing about it and sharing spreadsheets to steal ideas from. 
• The budget tracks our spending cash amounts in Germany. It's all in euros. If you added up the German credit cards, Girokonto and cash, it should basically equal the Remainder amount in the active budget month. 
• One sheet is a master list of transactions. In my last post I discussed the kinds of information stored there. We use "Date", "Vendor", "Budget Month","Category", "Amount" (with minus signs for expenses), and "Notes" in case there's non-repeating useful information. Both income and expenses are listed on the transactions list. 
• Following that are individual sheets for each month with the following structure: 
• On the left-most column are the categories with headings for "Income", "Saving", "Expenses", and "Totals". 
• The second column has expected amounts. Some of these are recurring expenses such as rent, and some are unique, such as "Travel" and "Household". The latter refers to general expenses that my wife and I agree on. 
• In the income section are our jobs and other occasionally recurring income sources in addition to the remaining or deficient money from the previous month. A month of frugality gives us money in the next month while a month of spending leaves us with less. Ideally though, there's neither a deficit or surplus because we don't overspend, and we try to save everything that isn't earmarked for something else ASAP.
• A special sub category is "BLOW". We each get the exact same "BLOW" each month, and it's just the leftover amounts after everything else is accounted for. "BLOW" is basically money one of us may spend without asking the other person, and we tend to put clothing purchases, restaurant visits, coffee, presents, etc. into "BLOW". Basically, there's a subtotal added up of the other categories, and then the blow cells are that amount divided by two. The exception is when we know we're going to spend more in a month than we bring in, in which case "BLOW" goes to zero. More on this later. 
• To the right of this column is "Actual", which contains the amounts as they're added to the master "Transactions" list. When building your spreadsheet, the =SUMIFS() function is your friend. The idea is to SUM everything from the "Amount" column of the "Transactions" list, if it matches both the "Category" and the "Budget Month". 
• To the right of that is a simple subtraction function that shows the remaining amount. Subtract "Actual" from "Expected", and you get a number. Multiply that by -1 to get something a bit more useful. For example, if you expect -100 but only spend -50 you'd have 50 remaining following this approach.
• At the bottom are the various totals and subtotals. One cell represents the actual remaining money after everything is accounted for. That gets referenced next month. 
• One sheet looks just like a month sheet, but it adds up everything from the year. This lets us plan out yearly spending and check our progress as the year goes on. 

Not too crazy, right? It takes awhile to build the spreadsheet, but it's pretty easy to manage once it gets going. It kind of looks like this:

Category	Estimate	Actual	Remainder
INCOME
MyJob	A number	SUMIFS calculation	=SUM(B2-C2)*-1
HerJob	etc.	etc.	etc.
Last Month Leftover
Other
SAVING
Retirement
Tagesgeld
DEBT
Credit Card
Student Loan
Car Loan
EXPENSES
Rent
Electricity
Groceries
MyBLOW	=IF(B24<0, 0, IF(C9>0,0, SUM(B24/-2)))
HerBLOW	=IF(B24<0, 0, IF(C9>0,0, SUM(B24/-2)))
TOTALS
Total Income	These	cells
Total Expenses (with BLOW)	are	full
Total Expenses (no BLOW)	of	SUM
Remainder (before BLOW)	functions	and
Remainder (after BLOW)	basic	math.

Saving/Paying Off Debt

When saving any money, it looks like an expense. When drawing from savings, it looks like income. Both get the same category, so that at the end of the year, it's easy to tell whether a net amount was saved vs. drawn from. So if we save €2.000 in February but withdraw €1500 from savings in April, we have a net €500 savings amount. 

You can have several sub-categories of savings, such as Retirement, Tagesgeld (basically the German low interest savings account), Emergency Fund, or whatever you want. Same rules apply for each. 

We are out of debt, but when we were paying it off, payments were an expense like any other.

Credit Cards

We use credit cards, but they are paid off every month automatically. Therefore, a credit card purchase gets added to the transaction list like a cash or a direct debit transaction. 

More about BLOW

A bit more about "BLOW". This can only work if you and your spouse are on the same page and are pretty frugal. Since BLOW is the remainder, and any savings appear just like spending earlier in the budget, there's an incentive to under-save earlier in the budget to give yourself extra BLOW. "Hey, if I don't save anything this month I can buy the new phone/bike/camera/console/computer/dress/coat/hat/etc." This is why deciding on a standard amount of monthly BLOW ahead of time is important. We budget around €200 per person per month as BLOW. Honestly, I'd like to even lower this number further because it really adds up, but that amount is low enough to not allow giant expensive purchases while allowing a fair amount of freedom, and BLOW covers a lot of stuff.

At the end of the month, BLOW is treated differently. This took me a while to figure out, but there should be some incentive to saving BLOW. Before I figured it out, unspent BLOW just became unspent money for the next month's total household budget, which meant you couldn't save up for anything in the BLOW category. It also meant that overspending on BLOW just got erased into the overall household budget, and that's unfair to the thriftier partner. 

So now, the BLOW amount is zeroed out at the end of one budget month and added into the next budget month. To do that, I add some transactions to the master list. The first makes the current budget month BLOW remainder equal zero. Basically, if the remaining amount is greater than 0, it gets subtracted from the current month and added in a separate transaction to the next month. If the remainder is less than 0, it gets added back to the current month and subtracted from the next month. This happens entirely in the BLOW category cells and doesn't appear as income at the top of the month sheet. 

In this way, BLOW surpluses and deficits follow you from month to month. In a way, it becomes a quasi-separate fictional account that's entirely tracked through the budget spreadsheet. One consequence: the Remainder cell at the end of the month will not include the BLOW remainder once the month is closed out. 

Split Transactions

This system allows for split transactions pretty easily. Just create two transactions from the same vendor on the same date and for the same budget month. Use SUM to show your work in the Amount column to show how you extract part of a transaction from the total.

=SUM(x-y)

Why do this? Sometimes I'll buy something as part of a larger transaction that mixes categories. My wife, for example, doesn't drink any alcohol, so if I buy a bottle of wine as part of a grocery spend, I will split that out to be part of my BLOW spend. This helps discourage us from underhandedly saving on BLOW while nominally spending on a shared category. 

Last Stuff

It works for us, but there's no guarantee that it will work for anyone else. Maybe the BLOW incentive is too much temptation. Maybe this seems like too much work. Maybe your significant other is unwilling to help. In any case, budgeting has been worth it for us.

Tracking Spending Overview

"Track your spending" has a better chance of helping than hurting. I've been tracking my spending for years, and I vouch for it. Thankfully my wife is on board, so we've gotten very good at it.

Some people who have really honed their habits don't need to because they have trained themselves to habitually avoid overspending. But if you are trying to change your financial life you probably don't have those habits yet, and it can only help to write things down. Plus, if you like gathering and manipulating data, writing down data about years of transactions can provide lots of possibilities.

Here are the things that are absolutely necessary to write down:

• Transaction date. You need this to know how much is coming in and out in a given time-period. 
• Vendor name. If you don't have one, then just make one up that's memorable. "Toilet" and "Kiosk" and "Apotheke" are common European stand-ins for fairly generic vendors.  
• Category. I personally think it's better to start simple and add complexity in response to necessity than start with dozens of sub categories. The categories that are necessary for you to track will reveal themselves over time. If you want to keep it really simple, just use categories for housing, transportation, utilities, food, and everything else (we use David Ramsey's "Blow" to cover a wide variety of things). If you have debts, add those in. 
• Amount. Obvious, right? I personally list expenses with a minus sign in front, since that makes it easier to add to spreadsheet formulas. 

Those are the biggies. Here are some others that might be useful:

• Budget Month. I use "budget month" because it lets me stick things that happen in one month in a different month. For example, if you get paid at the end of the month, you want that money for the next month and not the one that just happened. 
• Account. This might be useful or it might not be. If you're doing things with credit cards, it may be useful to know if some spending happened on a credit card rather than coming out of a cash account. 
• Notes. Maybe there's something unusual about the transaction that you want to easily recall. 
• Tax-Related. If you want to deduct something, it may be good to write it down at the time of purchase. I don't do this
• Project. This is a new idea for me. Basically it lets you categorize certain spending as part of a larger effort. So, for example, if you go on a vacation, there may be costs that are categorized as "Travel", "Food", "Lodging", "Blow", and on and on, but a project tag (in this case something like "2018_SummerVacation" or "2018_SavingsGoal") lets you track the entire extended spending for the effort. You could really go off the deep end on this if you start viewing your life as a series of larger and smaller projects. 

I personally write everything down in a spreadsheet. You could also use paper if you want, but spreadsheets have the advantage of being easily modifiable, and the data can be easily analyzed as you get better at using the spreadsheet. 

I use Mint additionally, but I don't rely on it for budgeting or contemplating my cash flow. It's great for seeing transactions pop up from all my various American accounts, but their budgeting tools are too stiff for my purposes. It's better than nothing, but I think the time devoted to developing one's own system is superior. 

Once you've been doing this for awhile, it becomes second nature. I won't lie: it can take some time to build the habit. Some ways to make it easier:

• If you carry a smartphone, write down every petty cash transaction in some kind of notes app. This is for when you don't get a receipt. I've used some automation apps on iOS to add these notes to the spreadsheet once I've written them down.
• Keep every receipt and then add them to the list later. Insist on receipts if it looks like the vendor will supply them. 
• Spend less and have fewer transactions so you have to do this less often. 

Budgeting and Decisions

Yesterday, my wife and I came to a conclusion: we will not be doing a big U.S. visit in 2019. I got super stressed about this decision while we were making it, but the decision became much easier after doing three things:

• Adding up the costs of the last big trip taken a few months ago. 
• Looking at our budget for the next few months. 
• Talking about the decision with each other. 

The numbers don't lie. The last trip was really expensive. Although there are areas where we could cut costs and optimize, the next one would likely also be expensive in unavoidable ways, and combined with some other upcoming costs and upcoming financial uncertainties (cough cough taxes) it meant we'd be opening ourselves up to too much financial risk. Additionally, even if the uncertainties went our way, another trip would set us back on our longer term financial goals. 

So we had to bail on the idea. I sent out the messages to the relatives. Sorry. No big trip this year. I'd feel guilty, except that I know the numbers and how unrealistic it is to expect to do this every year. 

This is one reason why we should set financial goals, track our spending and budget future spending. At numerous points in my life, major decisions were made much clearer when the budget spit out its numbers. Rather than just a vague unease with a purchase or choice, the numbers show us why we are uneasy. They show us how the unwritten budget math in our minds is most likely lying and presenting an overly rosy view of things. Nearly any major decision can be reinforced or rejected by checking the budget. 

But we have to make one and follow it. It's hard, but it's worth it. 

Saving Abroad

I've been living outside of the U.S. for a number of years now, and something I discovered after moving away:

It's tricky to save money as an American living abroad.

Because we're subject to U.S. taxation and our home country's taxation (in my case Germany), we often have to jump through hoops that most other people never even think about. You can get mad about it. I did. Having to do all this extra work and face the extra complication and potential tax penalties and costs from complying felt like persecution. For those of us who are earning a middle class living, it feels punitive.

It's unfair. Full stop. But there's not much to do about it other than:

• Give up.
• Deal with it and figure it out. 

And it's possible that you might have some fun figuring it out! At the very least, there's a lot to learn in the process.

So I'm writing this to help organize my thoughts about dealing with money while living abroad and potentially help anyone who comes across this material.

Why Save?

A colleague of mine was told recently by his boss that he had two days to visit his dying mother. She's in North America. He's in Germany. If you haven't made that flight, it's basically a day per trip. If he wanted more time, he could personally hire a replacement, whom he would have to pay himself.

I have long believed in saving, but this was a strong reminder. It was like an extra push on a slowly turning wheel.

Keep saving!

We should save because it gives us options. We should save because we hate being forced into a corner and accepting something just because we're forced to financially. Don't you hate that? That feeling of being stuck? I do.

Once we've saved enough, we have all sorts of choices. Before then, we have few choices.

I asked myself what I would do if in that situation. Right now, I'd probably accept it even though I've saved a bit. But in a few years, I hope to be able to say without much second thought, "Then it's been a pleasure working with you," and quit.

My colleague is in constant financial distress. He's quite open about it. Mortgage. New gadgets. Car loan. Expensive hobbies. The usual story.  He has few choices in this most recent situation. He has few choices in all sorts of situations. I really don't know what he'll do. Sometimes I just want to shake him.

But I don't know the magic words that would get him to change without him just resenting me, so I just try to be a good example and not heap too much praise on his expensive stuff. And I'll write here, to remind you and to remind me to keep at it.

Give yourself options.

Save.