If you want to have enough pension later in life, you have to start saving as early as possible. With these tips, 20-year-olds can easily build wealth.
The pay-as-you-go pension is a generational contract that has worked well for a long time. The principle is simple: Young workers finance older retirees by paying contributions into the pension fund. When it was introduced at the end of the 1950s, things went quite well; at that time, there were six employed people for every pensioner. However, demographic change has changed the initial situation significantly: there are now only two employed people for every pensioner. This development also reflects the pension level, which reflects the ratio of the standard pension to the average income. In the 1970s, the pension level before taxes was still around 60 percent. Since then it has fallen continuously – to currently around 48 percent.
The pension system is faltering and fears of a system collapse are growing, especially among young people. In the age range of 18 to 39, every second person assumes that their generation will not receive a statutory pension. This is shown by an Insa survey commissioned by the fund provider Fidelity International.
At the same time, fear of poverty in old age is growing: two thirds of young people between the ages of 18 and 32 fear that they will not have enough money when they get older. This was the result of a study by the opinion research institute GfK on behalf of the insurer Generali. Making private provisions is very important these days in order to prepare for old age. The following tips are particularly useful for young people who are now in their early or mid-20s:
#1 Use compound interest
Compound interest is an important tool for building wealth. Anyone who earns interest on an investment over time and reinvests it immediately can use the interest to earn interest again. The earlier you start saving, the stronger this effect will be. Even small amounts can grow into significant sums over time.
An example: 20-year-old Kim decides to invest 1,500 euros annually in an index fund. The fund offers an average annual return of six percent per year. Kim would like to invest in the fund until she is 65 years old – that is, for 45 years. Thanks to compound interest, she reaches a final capital of around 320,000 euros.
#2 Set up emergency reserves
Before you invest all your money in long-term investments, it’s worth creating an emergency reserve. This should cover ongoing expenses for around six months and be available at short notice. This means you are protected in the event of unforeseen financial difficulties and do not have to rely on long-term reserves. The best thing to do is to create a current account and put the money into it.
#3 Reconsider posts
The stock market promises the best returns in the long term. Broadly diversified and inexpensive exchange-traded index funds (ETFs) are suitable. In any case, it is important to be well informed in advance about the various investment options and, if necessary, to consult a financial advisor.
It is advisable to set up a monthly savings plan. This means that money is automatically transferred from the checking account to the deposit account. Anyone who automates their savings processes regularly pays a set amount directly into an investment fund. With every salary increase or financial gain, you should reconsider this amount and increase it if necessary. Even a small premium increase can make a big difference in the long term.
#4 Don’t take on debt
Logically, debt is a hindrance to building wealth at a young age. High interest rates on loans or credit card debt can significantly reduce your assets. You should therefore pay off existing debts as quickly as possible and avoid new debts – especially if they have high interest rates.
To avoid slipping into the red, it helps to regularly check where your money is going. Are there perhaps subscriptions that you don’t even use? Or insurance that is now unnecessary? A rule of thumb is: you should save and invest more than you spend.
#5 Set goals
At the age of 20, it is not absolutely necessary to save as much money as possible. You may be able to achieve even more at this age through alternative avenues that do not directly involve capital investments. For example, education must be seen as an investment. Anyone who continues their education and acquires new skills can improve their income opportunities in the long term.
It is important to think about your own financial goals as early as possible. It helps to formulate clear, achievable goals for the future and to think about when and with what standard of living you want to retire. Over time, these goals may change. That’s why it’s worth regularly checking your finances and adjusting your savings and investment strategies. This will ensure that you are well on your way to being financially satisfied in old age.
Source: Stern
