Safety is one of the basic needs of man, and today this means above all financial security. According to a large-scale survey conducted by GfK on behalf of Spiegel Online on the most important wishes of Germans in 2015, ca. 22% of respondents state that the aspect of financial security is very important to them. After health, one of the most important wishes in the survey and thus still red-hot today. But what does financial security actually mean and how can you achieve it?? The following tips and strategies will help you put any money worries in the past.
Debts are always more expensive than secure asset accumulation
Before you start to create a financial cushion for your daily life, you should first pay off all your debts. The reason for this lies in the fact that interest rates for loans are actually always higher than interest rates for safe investments. The average values of FMH Finanzberatung show this very clearly, even for the current time:
|Investment/financing||Interest (FMH IndeX)|
|Daily allowance||0,49% p.a.|
|Fixed Deposit (12 months)||0,39% p.a.|
|Installment loan, 3-year term||5,15% p.a.|
|Mortgages, 10-year fixed interest rate||1,24% p.a.|
Table 1: Average interest rates for secure investments and loans, Source: FMH Finanzberatung
From this it is quite fast evident that normal credits should be redeemed first, before a financial investment is interesting. A small example should clarify this for you:
1. Repay a loan for 3 years with an interest rate of 6.5% p.a.
2. Investment in a call money account with an interest rate of 1.00% p.a.
10.000 Euro x 0,065= 650 Euro
10.000 euros x 0.01= 100 euros
So if, in our example, the amount of 10.If you invested EUR 000 in a call money account and simply continued to service the loan, interest income of EUR 100 would be offset by interest costs of EUR 650. That would be a clear negative deal for you, which you should avoid.
Creating a financial cushion for everyday life – what is involved??
Unfortunately, in everyday life it can always happen that important items fail their service and need to be replaced. In such cases, it is very reassuring if you have a certain amount of security in your savings account. But what all should you consider when building a financial cushion? Here are the most important tips and strategies:
- The everyday reserve must always be quickly available for use in emergencies. For this reason, no investment with a long capital commitment comes into question for you. Therefore, a call money account or a time deposit with a short term is particularly suitable. If you want to take a manageable risk, you can also bet on pension or stock funds.
- Since we have to be liable for any unintentional damage to other people's property, it is also strongly recommended to take out liability insurance, according to Verivox. As a young professional, you should also clarify whether you may still be insured through your parents in the first few years.
- A good job with regular income is very important. But what happens if an accident or illness makes it impossible to carry it out?? The state pension for reduced earning capacity is hardly sufficient in these cases. This is why it can make sense to take out occupational disability insurance.
- Savings plans generated by yourself can take advantage of a psychological effect. You save a constant small amount every month, which you hardly notice in your wallet. After a certain period of time, however, a financial cushion is formed, which can be really helpful for you. When using a fund savings plan, you can also benefit from the average cost effect. Due to the always equal deposit, fewer fund shares are bought when prices are high and correspondingly more when prices are low.
- State subsidies for asset accumulation such as the employee savings allowance (for capital-forming benefits) and the housing construction bonus can be quite interesting. However, these are only granted up to certain income limits, and in the case of the housing subsidy, use for residential purposes is also a condition.
Private pensions – the second pillar of financial security
It is no longer a secret that the statutory pension will no longer be sufficient in the future to maintain one's standard of living in old age. According to the pension gap calculator of the fund association BVI, a man born in 1975 who started his career in 1990 and has a gross annual income of 30.000 euros at retirement will make up for a pension gap of at least 301 euros per month.
A young man who was born in 1995, started working in 2014 and is also 30 years old.If a person earns an annual income of EUR 000, there is still a shortfall of around EUR 215 per month to close the pension gap.
Private pension provision is a must
Here, it is especially important for the younger generation to start as early as possible and to exhaust all possibilities:
- Families with several children should definitely check out the possibilities of the Riester pension, because an annual allowance of up to 300 euros is paid for all children born after 2008.
- Self-employed persons, on the other hand, can claim large tax savings with the Rürup pension by making provisions for old age. Here it depends however on the respective investment product.
- Private pension insurance currently only offers a guaranteed interest rate of 1.25% per year. Due to high costs and fees, however, the return is significantly lower and surplus participations are now also very unlikely due to the low interest rate level.
- Due to the low interest rates for real estate financing, the purchase of a property can be a sensible addition to your retirement provision. But in this case you should already have a certain amount of equity capital. When choosing a property, you should also take a close look at the prices, as popular locations in particular are now considered overvalued in many cities. If you already have a Riester pension and later decide to buy real estate, you can still receive government subsidies through Wohn-Riester. The condition for this, however, is a later own use of the property.
- Of course, other financial investments are also suitable for private old-age provision. For example, investments in shares can be managed very well over a long period of time, as price fluctuations in the market are simply ignored. Only in the last few months before retirement is it important to shift into safe investments, as short-term fluctuations can hardly be compensated for.
The right time
The earlier you start with private pension provision, the more secure your financial situation will be in the future. If, for example, you already pay into a private pension insurance at the age of 25, and if possible even 200 euros, you can even receive a monthly pension of over 700 euros under the current conditions. If you start at the age of 35 and pay in only 100 euros, the monthly payout will be just over 200 euros. You see, the earlier you invest a larger amount in retirement provision, the more likely it is that your pension will be secured. However, you should study the pension plans of the different providers well beforehand and get detailed advice.
Financial security can be achieved through good planning
In conclusion, financial security is above all the result of good planning. If you cover the most important financial risks with liability and disability insurance and also manage to save a cushion in flexible investments, you will be prepared for everyday life. Private old-age provision, on the other hand, requires a long-term strategy, because as an investor you are often heavily restricted in the use of state subsidies. Before deciding on a particular type of retirement plan, you should run through various options. In this way, you can quickly determine which provision options ultimately best suit your own lifestyle. In the end, should both everyday and retirement financial security be taken care of, unforeseen stresses won't throw you off your game right away.