With my move to freelancing, a few things in my personal finances will change as well. For one, I will have to save for my own retirement.
Saving for Retirement
Now, of course, this blog is exactly about saving for retirement. However, retirement in The Netherlands works in three different ways.
First there is AOW, a sort of social security payment. Anyone of retirement age gets this, if they’ve lived and worked in The Netherlands. No change here.
Secondly, there is the pre-tax retirement savings. Usually, via your employer, you automatically save something either in a retirement account or via a pension fund. Depending on the numbers, you might be allowed to save some additional money into this pillar using pre-tax money.
Thirdly, there’s the investing and saving you do with your after-tax money. That’s what I have been doing the past few years. Nothing will change here, except for that I plan to invest a bit more than I used to do…
With my employers, I have built a retirement account using pre-tax money, however, that money was taken out of my pay automatically and therefor I have never “owned” it to begin with.
Now, as a business owner, I am still able to put pre-tax money into my account, but I will have to manage that myself.
Depending on your income, you can put in a maximum of between 12,000 and 13,000 euros with pre-tax money. The problem, however, is that only quite late in the year you know what you are allowed to put in.
Monthly Money Management
I love alliteration! And also, I love managing my money.
Since I will only know exactly how much of my pre-tax euros I can put into my retirement account, I will simply save the maximum possible (let’s say 13k) first, and keep that in the bank for a couple of months.
Besides saving the maximum in my pre-tax accounts, I plan to be a little more conservative this year regarding my investments. That means that I will increase my personal emergency fund from 6,000 to 10,000 euros, and everything above I will invest.
Those investments will be split 50/50 between mortgage payments (including the mandatory part of my annuity mortgage) and stock investments.
Unfortunately, I do have to pay towards the mortgage principal every month. So saving up 13k first, and then dividing the rest 50/50 between investing and the mortgage won’t work.
To make things a little bit easier, I drew a diagram on the whiteboard. Because that’s what consultants do. Excuse me for my handwriting.
Money Flow Diagram
It all starts with my business income, that arrives in my business bank account. From those accounts, I will pay taxes and business related expenses. The rest could be distributed to my personal accounts (of course I will save for a business emergency fund as well).
From those distributions I receive in my personal account, I will pay my personal expenses, and be left with savings.
Every month, I will pay my mortgage. The interest is part of the expenses in this diagram, the principal payment is counted as savings.
Under (1), I will match the principal paid, by putting that into my investment accounts. That way, I keep the 50/50 ratio between investing and paying off the mortgage.
Additional funds will be saved up (2) with a maximum of 13,000 euros. This money will stay in my bank account, and be allocated to flow into my pre-tax retirement account each year once the maximum gets published (depends on rules changing and income from the previous year, that’s why you only know this number later in the year).
If I saved up 13,000 euros but only got to put in 10,000, the rest will flow into my after-tax investments. Also anything above the 13,000 will flow into the after-tax investments.
That amount will also be split 50/50 between investing and the mortgage.
In my head this is all perfectly clear. Please share with me if you understand it. I want to know if I did a good job of explaining.