What are the benefits of personal savings
Investing money for beginners: the seven most important principles
Valeria Nickel, April 30, 2021
The topic Investment is about as popular as prophylaxis at the dentist. Everyone should actually take care of it on a regular basis, but it takes a lot of effort to put the idea into practice.
Once you've finally made up your mind to take capital-forming measures, the next problem comes: Those who want to invest money nowadays have endless possibilities.
What types of investments are there?
In addition to classic banking products such as savings accounts, overnight money and fixed-term deposits, investors can also invest their money in securities such as bonds (fixed-income bonds) or shares (listed company shares), funds (e.g. equity funds or real estate funds), but also tangible assets such as gold or real estate.
There are also new ways of investing money, such as crowd investing in real estate or companies, robo advisors or social trading.
Investing money is currently made particularly difficult by an extraordinary situation on the financial markets: Due to the ECB's zero interest rate policy, there is hardly any interest on classic forms of investment by banks such as savings accounts, building society contracts, overnight money or fixed-term deposits.
How can I invest my money correctly?
When investing money, many lose track of things right from the start and go straight to the bank or financial broker for advice. However, you won't always get the best deal for you there, because the Products with the highest commissions often preferred by the consultants.
With a little Initiative But even for beginners, it is not difficult to manage their investments on their own and to prevent their assets in low-interest savings accounts from being eaten up by inflation or from burning their fingers on expensive investments.
Successful financial investment means maintaining your invested capital through interest, dividends, price gains, sales proceeds or other income and also increasing your money through profits.
Invest your own money in 7 steps
- Determine your investment goal
- Determine your investment horizon
- Define the investment amount
- Be aware of the costs and fees
- Find out what type of investor you are
- Select asset classes and set their weighting
- Reallocate your depot if necessary
1 | Without a goal, the path doesn't matter either: Determine your investment goal
The first stepWhen thinking about investment strategy, it is important to set your personal investment goal. Because in order to be able to prepare well and invest money in a disciplined manner, you have to know what you are working for.
So first think about your personal motives: Are you saving for retirement provision? Do you want to make a special purchase, finance a certain phase of life such as studying in the medium term, start a family or simply build up assets that work for you?
Before you start investing and thus tie up your assets elsewhere for a longer period of time, you should make sure, first of all debt free to be. Overdraft facilities, installment loans or mortgage lending - debts are expensive and are not suitable as a starting point for a targeted investment.
2 | Whether short or long: Determine the investment horizon of your investment
Any form of investment is supported by three key factors affects: security, liquidity (or availability) and returns. One also speaks of the “magic triangle”, between the corner points of which all financial investments can be classified.
The principle is: the safer and the more liquid ("liquid") an investment is, the less return it generates (e.g. overnight money). And vice versa: if you get a high return on investing money, you usually have to cut back on liquidity (e.g. fixed-term deposits) or security (e.g. shares).
Magic triangle: characteristics that influence financial investments
All three aspects are equally important, even if the factors are particularly important on a regular basis Security and return should be placed in the foreground when investing money.
The liquidity When investing money, however, it should not be ignored either, because it often accompanies us in everyday life: If you are not liquid, you can neither shop, pay rent, refuel or settle other bills. It is therefore particularly important to consider how long you can invest money and do without it.
Investors should pay a sum of two to three monthly net income Put it as a reserve, for example in a call money account.
The investment period influences the success of the investment
At a Investment period We speak of a short period of up to one year, a medium period of up to five years and a long investment horizon.
Depending on Duration of the investment You can choose between different asset classes: For example, if you want to invest in stocks - a volatile financial investment - you shouldn't need your money for a long time. This avoids negative price developments leading to price losses because you need your money when the stock market is low.
A broad horizon compensates for fluctuations, gives investors the opportunity to sit out a stock market low, and thus reduces the risk of price losses. That is why the success of investing money basically depends on the duration of the investment.
3 | Saver or connoisseur: Define the investment amount for the financial investment
The next important question is how much money are you going to invest. To do this, you need to get an overview of your financial situation and calculate the amount that you do not need, either wholly or temporarily, for living and can therefore invest.
The Amount of the investment is critical to finding the right products to invest in. For example there is Minimum investment amounts Please note for forms of investment such as fixed-term deposits or savings bonds. In some cases, the conditions of the offers also depend on the investment amount.
Financial investments with a maximum investment amount, on the other hand, are rare, only the agreed interest rate could be capped up to a certain amount. Investors should inform themselves about this so as not to give away any interest income.
If you do not have a large amount of assets, it is worth building up gradually with a savings plan with which you can save a fixed sum every month, for example.
In addition, the following points should be clarified:
- Do you want to invest all of the money or split it up?
- Do you intend to top up the one-off amount through regular or irregular payments?
- Should interest be withdrawn from the investment or should it be invested further?
Would you like to invest a certain amount?
Read our posts on the following topics:
The goal in mind: Determine the desired return on your investment
It is also worthwhile to be clear about how much money you will need at the end of the investment period. With the Parameters starting amount, final amount and Investment period can be the desired Calculate asset growth.
Calculation example: asset growth through compound interest
|Value at the end of the term = asset value × (1 + interest rate)running time|
For example, if an investor has € 2,500 as a starting amount for the investment and wants to receive € 4,000 in 10 years, this is annual required growth in assets of almost five percent.
€ 4,000 = € 2,500 × (1 + x)10
x = 4.8%
What does inflation have to do with the desired return?
When investing money, you should always ensure that the expected increase in wealth offsets the current inflation rate. There is a simple reason for this: inflation means increasing purchasing power, which is accompanied by a gradual devaluation of money.
For investors this means: The inflation rate depends on the expected return deduct.
Inflation rate in Germany from 2016 to 2020
Source: Federal Statistical Office, as of January 2021
A bank pays interest on savings deposits of 1% p.a. However, the annual average inflation is 2% and thus exceeds the interest rate.
At the beginning of the year, a saver deposited € 10,000 with the bank at the appropriate conditions. At the end of the year, the investor received € 100 interest and his nominal account balance is € 10,100.
Due to the inflation of 2%, the money in the investor's account only has a purchasing power of only € 9,900. The saver has thus made a plus on paper - but the real value of his wealth has dwindled.
4 | Not to be underestimated: costs and fees when investing money
As an investor, you should also take into account the different costs of investing. While there are no costs at all with almost all overnight and fixed-term deposit accounts, equity funds are proportionate high management fees and there are often front-end loads when purchasing.
These costs significantly reduce the return on the investment: two percent of the investment amount per year is not uncommon. Therefore, investors should always look after where possible inexpensive alternatives look around.
Index funds (ETF), for example, are often recommended as an inexpensive alternative to equity funds. These are passively managed funds that are based on a predefined share index (for example the MSCI World, a global index with shares from 23 industrialized countries). ETF investors usually only have to pay a tenth of the costs that are set by funds with active management.
In addition, the following applies: The longer the investment, the cheaper it is. Because in the case of short-term investments, the deposit costs also play a role. Transaction fees are due for every change in your securities account.
Online custody accounts are often cheaper than custody accounts at conventional banks. Before you open a portfolio, you should compare the prices and fees of the different providers.
Also keep in mind that the withholding tax must be paid on investment income. This continues to reduce the personal success of the investment.
5 | No risk, no fun? Find your type of investor
Next, you deal with your individual willingness to take risks, which is made up of several components.
The actual willingness to take risks
On the one hand there is actual willingness to take riskswhich is influenced by the individual curriculum vitae, financial circumstances and level of education of the investor.
The fact whether you already have large amounts in classic, secure forms of investment such as a day or time deposit account also plays a role here. Because if this is the case, you can take a higher risk - and invest a large part of your money on the stock market, for example, in high-risk and high-yield securities such as stocks.
Why are savings deposits considered safe?
The statutory deposit guarantee protects bank deposits up to a value of € 100,000 per investor. Note that this only applies to European banks. Offers to save the world can be fixed-term deposit accounts from risky foreign banks.
However, if you only have a small amount of money apart from the amount to be invested, you should not take excessive risks when investing.
In addition, the actual risk capacity is influenced by your professional situation. For example, a civil servant may invest more riskily than a self-employed person whose future income is uncertain.
The emotional willingness to take risks
On the other hand, there are emotional risk taking. It depends on the individual character traits as well as previous experience and knowledge of the investor.
These two components are made up of three different types of investors:
|Conservative investors||For the conservative investor, the security of the investment is paramount. He wants little or no financial risk.|
|Balanced investors||Investors who value a balance between security and returns belong to the balanced investor type.|
|Offensive investors||Investors whose main goal is to achieve the highest possible return on investment belong to the offensive type.|
6 | Success with the right arrangement: weight your portfolio
It is essential to structure your investment sensibly in order to put your personal goals in the foreground and ultimately to achieve them. You should find a balance between low-risk and high-return investments that optimally suits you and your specific life situation.
|Overnight money||Investment funds|
|Fixed deposit||Exchange Traded Funds (ETF)|
|Raw materials (e.g. gold)||property|
High returns with real estate crowdinvesting
Conservative investors are increasingly turning to low-risk investments. You shy away from the risk when investing and protect yourself from total loss.
But be careful: because of the low interest rate It is currently often not worthwhile to invest money in a savings book, overnight money account or in fixed-term deposits. Always keep in mind that inflation will reduce the real return on your investment or even turn it negative. There is also an alternative way to reduce the risk of loss: Spread risks across the portfolio.
Invest diversified money
Spreading the money across different forms of investment protects against large losses. This is particularly the case if the individual items develop differently in value. Then losses with one investment can be offset by possible gains in another position. This strategy is also called diversification or risk spreading.
In a diversified portfolio, for example, part of the investment is in a call money account, part is invested in government bonds, and the investor also holds shares and invests in real estate.
Such diversification does not necessarily require a high level of capital investment. With ETFs, you can invest in stocks with a very low minimum investment volume. With real estate crowdinvesting, you can also invest money in real estate from as little as € 10.
7 | Don't let your money out of your sight: reallocate your portfolio
If your goals, the amount of money invested or the investment period change, you should adjust your portfolio. You should also change your portfolio composition when the desired payout date for an investment is approaching. It is therefore advisable to take a look at all systems once or twice a year to check whether their composition still corresponds to your strategy.
Example: restructuring of investments
This is what your annual reallocation could look like before reaching your desired goal:
|ten years||20 %||80 %|
|8 years||35 %||65 %|
|6 years||50 %||50 %|
|4 years||65 %||35 %|
|2 years||80 %||20 %|
However, shifting on a large scale is not always worthwhile: The rule of thumb is that securities transactions uneconomical if they cost more than 1% of the invested money.
Investing money - even without a consultant
Overall, when getting started with investing just a few important principles must be observed so as not to lose money in a headless manner. If you take the time to develop a strategy and compare the different providers and investment opportunities, you don't need an advisor and you can do yours Take wealth planning into your own hands. In this way you can achieve significant advantages for your personal wealth planning.
Find out about and compare different investment products and only invest if you understand the product.
Investing checklist for money
- When investing money, do not rely on bank advisors, but show initiative and act independently. Alternatively, you can also get help from a fee-based advisor.
- Before you start investing, you should:
- to clear debts
- Create a buffer of two to three months' salary
- Take a strategic approach to investing and define the following things:
- Your goals
- the desired investment period
- the amount you want to invest
- Your individual desired return
- Consider (especially in times of zero interest rate policy) the influence of the inflation rate on your investments.
- Be aware of the investment costs and fees.
- Consider the final withholding tax to be paid on investment income.
- Find out how much risk you want to take and weight your portfolio accordingly.
- Spread the risk of investing across different asset classes and forms of investment.
- Reallocate your investments over the years.
Quiz: How well do you know your way around investing money?
Everyone wants to invest money to make provisions for old age, to fulfill a dream or to look after the children. But you should acquire a little financial knowledge in order to make the right decisions. How is your knowledge?
Image Copyright: El Lobo / Shutterstock.com
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