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Why does it make sense to invest?
Here I would like to show you why investing is important. The sooner you start, the better.
Most people in Germany have little or no financial education. This is also partially understandable, because financial subjects are taught insufficiently at school and most people have no interest in their finances.
Many let the advertising direct them and consume their salary for things they don’t need to impress people they don’t like.
At the end of their working life, they then hold the state or other external circumstances responsible for their financial situation. The reasons for their own financial ignorance are not questioned.
It is relatively easy in particular for young people to build up assets for retirement or to escape the hamster wheel of working life ahead of time.
I hear many complaints that they supposedly cannot afford to invest. I can’t believe that – and I’ll show you why!
The effect of compound interest
If someone regularly invests € 100 per month in shares or an index fund after completing their studies or training and does this throughout their entire professional life of 45 years, then they have built up assets of € 452,340.22.
The person paid only € 54,000 and received € 528,944.30 in interest / dividends / price increases. The taxes of € 130,604.08 have already been taken into account.
Capital: € 0
Saving time: 45 years (professional life)
Paid-up capital: € 54,000
Interest rate: 10% (average return on shares p.a. over the past 100 years of the broad S&P 500 share index)
Interest: € 528,944.30
Taxes: € 130,604.08 (26.375% German capital gains tax and € 801 exemption amount)
Final assets: € 452,340.22
Surprised? That is the effect of the compound interest. Humans think linearly, so it is difficult for most to imagine this exponential effect.
In the first 27 years, the assets reached a value of € 100,000. For the next € 100,000 it will then only take 8 years, then another 6 years and finally less than 5 years to achieve total assets of more than € 400,000. The savings rates remain constant over the entire period at € 100 per month.
It is important to understand the effect, but it also requires a lot of discipline and patience, because the compound interest only really takes effect after 10-15 years (that’s the way it is with the exponential function). It is therefore important to start investing early and to think long-term.
If you can’t spare 100 € a month yourself, you may need it. really financial support.
The demand by CDU-politician Friedrich Merz to promote stock saving was only laughed at in Germany. There are similar programs in the USA, which are quite successful. Many normal employees are able to build up decent retirement assets in their professional lives through state funding. The state pension funds are relieved.
But I don’t want to go into the political framework any further. It is crucial that you choose to take your finances into your own hands and not make yourself dependent on external circumstances.
Excuses are always easy to find, responsibility for your life can only be assumed by YOU.
It depends on you
It is only up to you whether you take control of your finances yourself or not. Take time to think about the people from whom you will take financial advice. Regardless of whether they are valued family members or friends, ask yourself the following questions:
Are they financially successful or independent?
Do they have experience on the stock market yourself? Otherwise why would you believe them?
Can you learn from them?
Do they have prejudices or justified objections?
My humble contribution
I am convinced that long-term investing makes a significant contribution to wealth creation. Make up your own mind about it.
If you want to learn more about a few basic rules of investing, then read my post on Smart Investing.
If I should have piqued your interest, I recommend two books to deepen your knowledge:
A book worth reading, less about the right investment strategy but more about the right mindset, is “Rich Dad Poor Dad: What the Rich Teach Their Children About Money” by R. Kiyosaki *. The author describes in an entertaining way why it is important to invest in your own financial education and that you can achieve financial independence with it.
The best book I’ve ever read about investing is “Poor Charlie’s Almanack: The Wit and Wisdom of Charles T. Munger” *.
This book contains the wisdom of legendary and highly intelligent Berkshire Hathaway Vice Chairman Charlie Munger. In addition to advice on investing, the book on its more than 500 pages also bursts with wisdom of the 95-year-old American about a fulfilled life.
BUT: In my opinion, it is only suitable for really interested readers. If you count yourself among them, then you can expect a great reading experience.