Stop consuming — invest in your future instead!
For Generation Y in particular, saving will be an important factor when it comes to private retirement provision. But saving doesn't mean saving here, but investing! In this article, you can find out what this could look like, why investing has many benefits for you and what risks consumption entails.
Investing vs. consuming
Everyone knows how to consume. This means the procurement and associated use of a good of any kind using financial resources. Consumption therefore means buying food, for example. In the private sector, investing means using financial resources to increase private wealth through income. An investment can therefore represent the purchase of shares, as private wealth can be increased here through returns. It is important that buying a house or apartment, for example, is a classic investment. However, owning the property moves the investment into a grey area between investment and consumption. Because when you own, there is no rental income that increases your own wealth. In contrast, a potential increase in value can increase wealth despite personal use.
It's the right balance that counts!
A clearer picture emerges as soon as we look at the two extremes, consisting of absolute investment and absolute consumption. It is clear that a life consisting of investing all available income does not work. Money must be spent on running costs such as rent, food, etc. Humans have basic needs, which must be met through consumption. The other extreme also poses problems and risks. Imagine spending your entire income on consumer goods every month. In this case, you invest nothing and cannot build up reserves for unexpected expenses; let alone make provisions for your retirement age in any way. Possible loan repayments can lead to a further burden here. It is therefore important to build up reserves in the short term and to invest in the long term. This makes it clear that you need to find a middle ground between investing and consumption so that you are satisfied in the short and long term. How much of your wealth should be that you invest for future goals depends on your individual needs and goals. At the same time, you shouldn't lose sight of your retirement savings.
Reasons for investing
There are many reasons why investing makes sense. The most important ones are briefly presented here:
1. Sustained period of low interest rates: Because savings, fixed-term deposit or call money accounts offer very low or no interest at all, it makes sense to move your money to other investments, such as stocks or funds. Here, it then generates the so-called passive income and you let the money work for you, so to speak.
2. Compound interest effect: This effect is particularly important when it comes to long-term investments. This means the interest rate on interest received. Albert Einstein already said: “The greatest invention of the human mind? The compound interest! ”. Let's compare two people here, Sarah and Stefan. Sarah starts investing 100 euros a month for 10 years at the age of 25. Stefan invests at the age of 35 and also deposits 100 euros every month, but for 30 years. Both receive the same interest rate of 8 percent. Thanks to the compound interest effect, Sarah saved a fortune of 182,508 euros at the age of 65. Stefan only saved 141,830 euros, even though he deposited 20 years longer. The decisive difference is that Sarah started investing earlier and after 10 years only allowed the compound interest effect to increase money to work without adding money from her own capital. It is clear that exploiting the compound interest effect is particularly worthwhile when investing early on.
3. Inflation: This describes a devaluation of money over the years. In order to still be able to afford the same things next year with annual inflation of 3 percent, you also need 3 percent more money. In order to maintain purchasing power in the long term, it makes sense to invest in stocks or funds.
4. Private pension provision: Due to demographic developments in Germany, Generation Y will no longer be able to count on the pay-as-you-go pension system. The aim here is to become privately active and invest in funds over the long term and make provisions yourself through the compound interest effect.
What can you invest in?
Basically, you can invest in almost anything. It is important to note that every investment and its return is linked to a risk. This must be considered with every investment. Real estate and funds are particularly suitable for long-term investments, such as private retirement provision. Thanks to the invested assets, real estate offers a particularly high level of security due to the near-zero probability of total loss. Anyone who wants to take a closer look at the financial market can also invest in individual stocks and thus hope for higher returns. But alternative investments, such as classic cars or wines, which predict an increase in value in the future, are also options.
