Hiya, this is a post especially for graduates. I’m writing a series Personal Finance 1.0 on personal finance topics that you should know when starting life on your own. If you’re an older reader, maybe this specific topic is interesting for you also. Or you know someone who could benefit from this information. So please feel free to share this post.
Right, let’s get going!
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If you read the other posts in this series, you already know that I suggest you’d spend less than you earn. This enables you to build up an emergency fund, and to save for vacation travel or other larger purchases. And you’re set up for the second job you want your savings rate to do, investing.
This might seem very far away now, but there will be a point in time when you don’t have earned income from a job anymore. For most people this will be traditional retirement. But maybe you’ve already entertained the thought of “early retirement”. Or the idea of having the option of leaving the corporate world on your own terms, whenever that need may arise.
In all these cases you will need an additional source of income. Yes, sadly even if you plan to work up to official retirement age. In Germany, the statutory state pension will only cover a fraction of your last take home pay. Current plans aim for 42% (and that only up to the “Bemessungsgrenze”. Thus high income earners will have to cover a larger gap).
Build up job-independent income streams long-term
So this means you’ll save part of your income on a “Tagegeld”– or “Festgeldkonto” till you stop working, and live off that afterwards, right? Unfortunately this is not a viable plan, given the current low interest rates for these types of account. Inflation will eat away the purchasing power of your money across time. A very vivid illustration of inflation always strikes in summer: do you know any ice cream parlour where the scoop does not cost more each year. There are other groceries for which this goes as well, rents increase, and so on.
That’s why one part of your savings rate has to deliver returns that can keep up with inflation in the long run. You switch from mere saving to investing. And thus start building up assets that have the potential to spin off income independent of paid work later.
Stocks or real estate
Two classic options for this are stock and real estate investments. From my own experience I’d say the most simple and passive variant for you would be to invest in globally diversified ETFs (Exchange Traded Funds) on a regular basis, e.g. each month. That’s the recommendation I gave our son as well. You can read trough my basic information around building income streams with stocks and further references here.
If you’re passionate about real estate, direct investments in this sector could be interesting for you as well. My worry is that there’s a bit of an overhype currently, in particular in the German Youtube community. In any case, get broad information from a variety of sources, and make yourself familiar with the regulatory framework around real estate investments in Germany. You’ll find my post with basic information around building income streams with real estate here.
And since we do own several rentals ourselves, I’ve tackled issues around the property, financing, and the renters in separate posts.
Ready, steady, go – and don’t fall for investment scams
As you know, I’m not a a fan at all of buying insurance products for retirement provision, you should always keep insurance and wealth building separately. And if someone wants to sell you a get-rich-quick-scheme all alarm bells should start ringing – something that sounds too good to be true usually is. A very good source especially for job and investing starter is Finanztip’s Youtube Channel (in German), do check it out.
So that’s been the last part of my little series for you. Take the first step, and start implementing. That way you’ll be set up really well where your personal finances are concerned. If you have any further questions, feel free to get in touch. All the best for your journey!
Katrin / Financial Independence Rocks!
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