As life progresses, priorities shift. And so, depending on your age, your investment strategy can change. Starting a career, in the middle of life or already with retirement in sight – in our financial series we show examples for women around 25, 40 and 55.
When it comes to skin care, most of us have internalized a set of rules of thumb: apply enough sunscreen in your 20s, remove makeup before bed, and As you get older, care may become more intensive.
Aging well – that’s what our finances should do too. Building wealth and making provisions for old age is important in all phases of life. And as with skin care, the sooner you take care of it, the better. Anyone who gets involved early will particularly benefit from the compound interest effect. Even with small amounts, a lot can be achieved over the years. And then it’s time to stay on the ball throughout your life. Over time, not only our income, but also how we deal with money, our demands and our living situation change. That’s what our series is about: Which investment suits which lifestyle?
First of all: Even if investments – like every skin type – are highly individual and priorities can shift, some basic rules apply always and to everyone. Number one: an amount that should always be available to repair or replace broken equipment in an emergency without having to take out a loan. An amount of three net salaries is recommended, which is best kept in a daily money account. Depending on the credit institution, there are currently interest rates of over 3.5 percent.
Anything else that can be invested should ideally produce higher returns. This is currently possible with fixed-term deposits, which are invested for a year or longer, for example, and bring a little more interest than overnight money. Women should also invest some of their money in the capital market – even if that involves more risk.
Don’t be afraid of fluctuations
“Many people categorically reject any investment method that has to do with fluctuations,” says Katrin Löhr, professor of finance at the Dortmund University of Applied Sciences and founder of the financial coaching company Financial friend. An investment in a globally diversified Exchange Traded Fund (ETF) is subject to short-term fluctuations. But in the long term, the experience of the past decades always shows a positive performance of the stock markets. The global index MSCI World, for example, has gained an average of 8.25 percent per year since 1987.
“Conversely, many people don’t know the difference between gambling and investing,” warns Löhr. The credo should be: Only buy what you understand and never put all your eggs in one basket. In the best case scenario, investors spread their money across many different assets and thus spread the risk of loss.
The principle also applies to women: A man is not a pension plan. Many people still leave financial matters entirely to their husbands. “I recommend that every woman save for old age separately from her husband,” says Gabriele Radl, founder of FIS Finanz- & Invest-Services in Frankfurt and board member Financial specialist women, a network for women’s financial advice. She sees such cases in her advice: women who have to rearrange their financial affairs after a divorce or the death of their partner. “You never know how things will turn out in life,” says Radl, “and often things turn out differently than you think.”
Part 1: Investing at 25+
25 years young, looking for a sexy depot
The 20s are exciting: finished with your studies or training, your first apartment of your own… Anyone who builds up assets now gives themselves a decisive financial advantage.
A very special moment in life: the first real salary for the first real job is in the bank. Finally no longer have to rely on BAföG, training allowances, minimum wage part-time jobs, maintenance. No matter what number is on the account: Most people feel rich at this moment and as if the world is their oyster. But often with more money, a few expensive habits quickly creep in. The coffee at Starbucks instead of in the thermos cup you brought with you, the manicure in the salon instead of doing it yourself at home, the taxi home instead of the subway. All of this is suddenly affordable.
And all of that is okay. But: “When you’re young, you shouldn’t just enjoy life, party and work 30 hours for the sake of your work-life balance,” warns financial advisor Gabriele Radl. She often believes that it is untrue that there is not enough scope with the first salary to make provisions for old age. “If you spend 50 euros on cosmetics or clothes during your lunch break, you can also save for your pension.” The pension gap increases over time and becomes increasingly difficult to fill as you get older.
You can also look at the whole thing as an opportunity: the 20s actually hold great financial potential. After completing your training, you often suddenly have hundreds, if not 1,000 euros more per month available, while the cost of living remains unchanged for the time being. If you don’t rush to adjust your standard of living to your new salary, you can save a lot of money at this time. “I recommend that you act as if you only have 80 percent of your net salary available in the phase of your life after your studies,” says economics professor Katrin Löhr. “If the remaining 20 percent goes directly out of the account every month from the start, you won’t notice it after a few months, but you’ll be shaping your financial future at the same time.”
Saving as a habit
Whether small or large amounts: Saving should become a habit early on, says the financial expert. Firstly, the compound interest effect helps: Anyone who reinvests interest also receives interest on it – so the money increases even more. Secondly, you get used to this type of self-care. When it comes to financial education, Löhr also likes to talk about financial wellness: “Finances and wellness are not that far apart. It is very beneficial to know that retirement provision and finances are regulated.”
Finding the right investment method is all about finding out what your short-term and long-term savings goals are. Pay back BAföG debts, get married, travel around the world – or finance your first property? The investment goal defines the investment horizon, i.e. how long it takes until I have to access the money I have set aside. For example, if you have at least ten years until your dream comes true, it’s best to invest your money in the capital market, because interim fluctuations in share prices always balance out in the long term. If a large part of the assets has to be available in two years, it is better to have this part in a fixed-term deposit account. In this way, savers avoid losses if they need the money at short notice during a bad stock market phase.
Three investors at 25 – and what the financial experts advise
Abigail, retail clerk, 2200 euros gross
Would like to get married next year, would like to have a property with her fiancé in about five years and then also have children.
It is best for Abigail and her partner to save up equity for their real estate financing, which they will have to show to the bank. As a rule, this should be at least 20 to 30 percent of the price. With an investment horizon of only five years, the majority of this money should be safely parked in a fixed-term deposit account: “Investors always have to expect a bad market phase“, warns Katrin Löhr. The couple can still invest a small share of five percent with a little more risk and then pay a special repayment later. An ETF on the world market, such as this, is suitable for this MSCI All Country World or the FTSE All World.
A property you use yourself is part of your retirement provision because it means rent-free living in old age. “But that alone is not enough,” says Gabriele Radl. Even after buying a property, Abigail should save part of her income for retirementfor example with a fund savings plan.
Lara, trainee teacher, 1500 euros gross
She has just completed her studies and is staying in her shared apartment for the time being. She wants to put whatever is left of her salary each month into retirement provision. In addition to returns, environmental criteria are particularly important to her.
Since Lara doesn’t want to touch her savings for a long time, she can invest her money on the capital market for the long term. So-called ESG funds take special sustainability factors into account when investing. “ESG” stands for Environmental, Social and Governance – i.e. the factors environmental, social and corporate management. For Lara, for example, thematic funds that focus specifically on renewable energies could be interesting to add to her portfolio. However, not everything that says ESG is green, warns Gabriele Radl, there have been a number of greenwashing scandals in recent years. This can serve as a guide when selecting funds FNG seal of the Sustainable Investment Forum (fng-siegel.de). Funds and ETFs have to reapply every year in order to meet the seal’s strict minimum standards.
There are also sustainable variants of globally investing ETFs, such as those on MSCI Socially Responsible Indices. Compared to the traditional MSCI World, they only include the most sustainable 25 percent of companies from each sector. This selection method is called the “best-in-class approach”. There are around 400 companies in the MSCI World Socially Responsible Index, compared to around 1,500 companies in the MSCI World. Companies from controversial industries such as weapons, alcohol or tobacco are excluded. Because index funds have lower fees than actively managed equity funds, the returns are often statistically better. The disadvantage: With passive funds there is usually a lack of ongoing sustainability testing, unlike an actively managed eco fund, whose managers can gain more insight into the companies in which they invest.
Kaya, sales manager, 3500 euros gross
Works as a sales representative in a large corporation, wants to build wealth in the long term, but also wants to try out the capital market. She is tech-savvy and is interested in tech stocks and cryptocurrencies.
Kaya should only invest “play money” in cryptocurrencies such as Bitcoin or Ethereum, which she can do without if in doubt, if the price collapses. The same applies to individual stocks – including those of technology giants such as Alphabet or Apple. “A gambling portfolio where I try out the capital market is fine, but only with the awareness that everything can be gone overnight,” says Löhr. “This should then be separate from the retirement savings account, into which the savings flow.” With her long investment horizon, Kaya can rely on a 100 percent equity quota. A cost-effective world ETF is also suitable here.
Gabriele Radl… is the founder of FIS Finanz- & Invest-Services in Frankfurt and board member of FinanzFachFrauen.
Katrin Löhr … is a professor of finance at the Dortmund University of Applied Sciences and a financial coach.