Tuesday, July 16, 2013

How much should I be saving?

I'm positive I must have posted about this before because it's a question that does exercise my mind from time to time. At the moment, I don't save a lot because I'm still paying down debt. I (shock!) don't even have the 1,000 emergency fund that Dave Ramsey & co. recommend having before paying down debt (other than minimum payments of course). I put money for annual expenses aside and have slowly started trying to add a bit every now and then to a travel fund.

Once I have paid all my debt off I am going to allow myself two months of spending every cent I earn if that's what I feel like and then I want to focus on really saving hard. Ideally I'd like to save as much as I've been putting towards debt the last few years - most of it into emergency fund followed by a big life plans fund once the emergency fund is at a reasonable level but also some into things like a travel fund and a splurge fund to use for gifts, concert tickets, books, that kind of thing.

I've seen this topic come up on various blogs over the last while (and terribly sorry for not giving a shout-out to whoever's blog I read it on today, it was a new to me blog that I linked to via two or three other links-to and I haven't been able to follow the same path to find it again). Rather than absolute cash terms, of course, the interesting question is to see what you save as a percentage of income. For example, if I expect that moving to a position in a university would entail a probable 40% reduction in salary for me, then the sensible thing to do is to make sure I am saving more than 40% now, for example 50%, so that when the 40% is gone I'd still be able to save 10% without it 'hurting' too much.

At any rate I also started thinking about pensions etc. Everyone says you have to be very careful to plan for retirement but the cynic in me honestly doesn't really believe that by the time I reach retirement age (which is now, I believe, 67 here) the world, complete with financial markets etc., will still exist in the same way it does today. However, I do still contribute money every month to a private pension plan 'cos you never know, right? The plan I contribute to does have some immediate tax benefits so that something at least. And of course, with every paycheck I am contributing to the state pension and all the other social insurances here. I decided to work out how much of my hard-earned cash is going to the government every month. These figures won't be absolutely right to the nth decimal place as I do get a payment from work for transport costs which shows up partly pre-tax and partly after, which skews things slightly but in the greater scheme of things (and since I rounded everything up), it should still give you a pretty good idea of what I already contribute to before I even see a cent of my money. I should note here that I am definitely a socialist and I don't have any problem at all with paying to fund the mostly excellent social net that Germany has. While spongers and professional unemployed people really annoy me, I also know that there are genuine reasons for people to not to be able to work and if it ever happens to me, I like to think that at least my basic needs will be met. My brother is on long-term disability, for example, and I have to agree with my cousin who, not having seen him for years and, on asking him where he was working, hearing that he wasn't, simply said, "Well, I'm glad my tax money is at least going to support some people I like."

Back to deductions, which are high in Germany. From my salary I pay the following:

  • Income tax - 20%
  • Solidarity surcharge - 1% (I think this is actually worked out as a percentage of income tax, i.e. 5% of it but it works out to 1% of gross salary more or less so I've just gone with that. The solidarity surcharge was introduced after reunification to help to fund the re-building of the 'new' federal states, i.e. the former East Germany)
  • Health insurance - 8% (I'm a member of one of the public health insurances - they're not state run, but aren't private either and the tariffs are now set by the government)
  • Nursing care insurance - 1% (This was introduced years ago due to the rising age of the population and the number of people who needed nursing homes. There's talk about making it obligatory to also take out a private insurance for this as demographically it's obvious that in future years, there's going to be an even bigger issue with this)
  • Pension insurance - 10% (I have an appointment in a couple of weeks with the central pensions place to make sure the time I spent making contributions in Ireland is counted towards what I'll eventually be able to claim here)
  • Unemployment insurance - 2%
So that's 41% of my salary already gone before I ever see it. My employer, by the way, has to pay equal or almost equal amounts for the social insurances mentioned above. And I can offset certain items against my income tax and solidarity surcharge every year so that 21% goes down when that happens. At least as an atheist I am spared having to pay church tax, which would be another 1% of income tax or something like that.

The private pension I pay into is another 6% (or 4% of take-home). Then there's the dental insurance I have, a modest 1.2% of take-home. Regular donations to charity are now just over 4% of take-home and I'll probably up this to about 5% next year. I also need to think about setting up a separate category for one-off crowd-funding and/or a micro-credit scheme like Kiva, which is something I've become more interested in lately. In case anyone has any spare money to give to a good cause, by the way, mmpaints is just US$380 short of reaching her goal to try and do some repairs and upgrades so that she can keep her small farm business going.

Oh dear. I suspect I may have actually had a point to all of that with the deductions but it's after eleven now, it's still over 20 degrees with nearly 70% humidity and my brain seems to have shut off. Would be interested to hear if anyone else wants to share what kind of percentages they're putting towards savings though.

The malt beer gulasch from the previous post, by the way, was entirely underwhelming. I ended up having to add in a whole lot of Worcestershire sauce just to rise it even marginally above bland. Great idea and a very simple sauce (easy to have a bottle of malt beer on hand) but if I ever do it again, I'll be experimenting with using lots and lots of spices in it. Upside: I was telling some people from choir about it last week and getting Germans to try and say Worcestershire is kind of amusing if you're in a silly mood. LOL

And here, just for good measure, if a photo of the lovely carnations I bought a couple of weekends ago. Carnations are probably one of my favourite flowers, especially when, like these, they actually have a scent.


Fiona said...

So interesting to see the figures from overseas and how it all works.

Here in Australia, we have a sliding tax scale (higher earners pay more) but income tax steps from 20%, to 32.5% to 37% to 45% at the highest end.

On top of that we also have Medical Levy of 1.5%, Disability Insurance Scheme of .5%. Private Health insurance is additional again.

However here, employers pay approx. 10% extra on salary into our retirement savings.

Moonwaves said...

That sounds more similar to here than I would have suspected actually. With the levies being for specific things, I mean. In Ireland you pay income tax (called PAYE for pay as you earn) and pay-related social insurance (PRSI) and the way the bands are calculated is ultra-complicated. A universal social charge has been introduced since I left, too and civil servants now also have to pay a pension levy.
There are a lot of different deductions in Germany but I like that at least they have specific purposes rather than everything going into one big pot.