Investing for beginners

How can I invest money properly?

Investing for beginners often raises many questions at the beginning. How much capital should I invest? What about fees and taxes? Moreover, complicated financial instruments and opaque offers do not make it any easier to keep track of things.

For this reason, in this article you will learn the most important basics of how to invest money properly. What is necessary before investing, what type of investor you are and what are the risks. We start at the beginning and take you step by step to your individual investment strategy.

For the time being, however, we do not list any specific forms of investment in this article. First, a solid financial knowledge foundation should be built. Only then can an investment decision be made.

Accordingly, if your knowledge is already solidified, the article The Best Asset Classes in 2022will cover each investment opportunity in detail.

Build your foundation

Pay back your debts

It is important to repay all outstanding debts in the form of loans. These debts usually have high interest rates and reduce your income month after month and thus your investment capital.

An important principle is that you speculate only with your own money. Don't take out a new loan from your bank or ask friends for loans.

Keep expenses low

We live in a consumer society and incessantly buy items that we often don't need. Therefore, every amount of money saved will bring you closer to your goal in the long run. Our tips for this:

• Plan your spending wisely and question every purchase.
• Switch to an online bank with better conditions.
• Sell unused items on flea market platforms.
• Cancel unnecessary insurance and subscriptions like Netflix or Disney Plus.
• Use public transportation whenever possible.

Increase your income

Reserves are initially required for investments. It is therefore advisable to increase one's monthly income. Some income streams take a lot of time, others need little attention and are quickly profitable. For this purpose, the following tips.

• Keep track of everything through a budget.
• Become self-employed on the side or act as a freelancer.
• Demand a higher salary from your management based on professional development. Increase your human capital!
• Educate yourself about passive revenue streams.

The financial cushion of three months' salary

Build up a nest egg of at least three months' salary. This buffer is only for emergencies and not for investments or daily expenses. Rapid liquidation of investments can happen at an unfavorable time in the market.

Example. You need money for a car repair and liquidate your stock portfolio for it. The market is at a low point right now and you are making a loss on it.

Advice and contact points

Experienced investors are increasingly deciding for themselves which financial products and strategies to pursue. For inexperienced individuals, it may be helpful to seek guidance. The following are four of the most common places to go for investment advice.

House Bank

Your local bank offers a variety of investment products. However, the selection is severely limited to in-house offerings. In return, your bank advisor receives a commission. However, products from the competition are rarely offered. Your house bank cannot offer you a market-wide comparison.

Online broker

The term refers to companies that offer services similar to those of a principal bank. An online broker is accessible only through the Internet and has no local branches.

At the same time, they usually have better conditions in terms of account management and securities trading. A direct consulting service is not offered.

Rather, social trading options are provided for investors. Here you follow other investors and their strategies, which were successful in the past.

Financial consultor on fee basis

A financial consultant on fee basis can provide you with a comprehensive and objective investment proposal. Money is charged for the service, but in return you get a customized package of market-wide opportunities.

Robo Adviser

A robo adviser is a digital asset manager. It acts on the basis of personal risk appetite and manages capital. The Robo Adviser algorithm makes decisions such as buying and selling investments.

This eliminates the possibility of human error. Inexperienced investors often react emotionally to major market fluctuations and make the wrong decisions. It is also a time-saving option.

Define your goals SMART

To strengthen your willpower, you need to know what your drive is. Do you want to own a home or save money for a sabbatical? Therefore, you should ask yourself how much wealth is needed for your goal. A good method is to formulate your goals SMART.

Here are some examples of what a SMART defined goal looks like.

• Buy a car for 25,000 euros in 8 years.
• Establish reserves of 10,000 euros by the end of the year.
• Receive a pension of €1000 per month to have no worries in retirement.

Put your goals in writing. Having a clearly defined goal is an important step in investing your money the right way.

What is the required investment amount?

What investment amount is necessary at the beginning cannot be answered in a general way. The investment amount is made up of various factors.

• In what time frame do you want to reach your goal?
• How much risk are you willing to take?
• What is your target amount?

Rather, the more important question is which assets can currently be used for investments.

You don't need €100,000 to invest money the right way. Nevertheless, some financial products are only conditionally suitable for small amounts.

Minimum deposits must be observed for financial products. Likewise, the holding period of an investment has an influence on the required capital.

Find out what amount of money you have available.

1. Make an overview of your current assets.
2. Subtract your financial buffer.
3. Subtract outstanding debt from this.
4. Note daily living expenses such as car, rent, and groceries.

What is a savings plan?

If no large sums are available at the start, it is worth setting up a savings plan. This involves successively investing a monthly amount or saving for a larger investment. Savings plans are useful from as little as €50 and can be debited directly from the bank account.

The editors recommend setting up a monthly savings plan. Even with small amounts, it pays to save.

But how much of his net income should now be saved monthly? The answer is, anything that is not used for daily living. Question how much you are willing and able to save.

Even if you only have €50 available each month, it makes sense to think about your investment strategy. However, you should aim for a savings rate of over 30% of your net income in the long run. The optimum would be 50 to 60 %.

If you invest directly with a savings plan, this has several advantages. You don't need a lot of capital to get started. Additionally, you use the “dollar cost average” effect or average cost effect. It helps to prevent emotional trading and thus maintain an average price over a longer period of time. This means that ill-considered purchasing decisions based on market developments can no longer happen.

Define your time horizon

The investment period is an important factor in the selection of a financial instrument. It describes how long the capital employed is not needed.

Assets from a call account can be liquidated quickly. It has high liquidity. Real estate, on the other hand, must first be sold and transferred. Invested sums can only be liquidated slowly.

A time horizon of one year is referred to as a short investment period, five to ten as a medium investment period, and beyond that as a long-term investment. Duration is a basic aspect of the right asset class.

As an example.
Stocks are a good choice if the capital is not needed in the next five years. Market fluctuations are absorbed over time. This minimizes the risk of loss.

What rate of return is needed?

Once the starting capital, investment period and target amount have been determined, the required desired return can be calculated. It should serve as a guide to how much profit you want to receive on your deposits each month. This will systematically bring you closer to your goal.

The formula to calculate your target return is:

Investitionsziel = Anlagewert x (1 + Zinssatz)Laufzeit

Example.
A final capital of € 8,000 is required. As a starting amount 5000 € are available and one sets a goal of 10 years. This results in a desired return of 4.81% before taxes.

8.000 € = 5000 € x (1 + x) 10X = 4,81 %

In this context, the compound interest effect has a strong impact on the capital investment. Albert Einstein once called compound interest the eighth wonder of the world. Interest is awarded on the interest already earned.

Exponential growth occurs in the long run. This means that the longer financial instruments earn returns, the greater the interest and thus your profit.

Find your risk class

There is no return without risk. How much risk you take depends on your current life situation, financial circumstances and personal willingness to lose money. Two cornerstones are important here.

Risk capacity

Risk capacity is an objective view of how to cope with financial losses. It is probable and unavoidable that you will have to cope with losses from time to time.

Investments must never jeopardize the standard of living to which people are accustomed.

Answering the following questions is essential.

• How much income or assets are available?
• What amounts can be invested?
• Is there already a financial cushion?

Risk appetite

Unlike risk-taking ability, risk appetite depends on your character. This is a summary of your personal knowledge and experience of financial products. How you deal with losses and react to market fluctuations.

The type of investor profile determines which financial instruments should be used.

Fees when investing?

Various cost factors can reduce the profit generated. It is not uncommon for administrative fees to be charged for investments. Generally, the more long-term an investment is, the lower the fees.

Fees of 2% don't sound like much, but they significantly reduce returns in a variety of asset classes. Anyone who buys shares must pay attention to transaction fees as well as custody fees.

In addition, there is capital gains tax, which is levied on domestic income from capital assets. A house bank pays this tax amount to the responsible tax office. Some online brokers also offer this service. These are referred to as tax-simple brokers.

If a tax-simple broker is not used, the tax itself must be determined and transferred to the tax office. The amount of taxes and possible allowances differ between states.

A brief overview of tax amounts

*No guarantee for the listing. Tax rates and allowance may change.

Also, be wary when high returns are promised. There are many “financial gurus” who promise you wealth in a very short time. These dubious financial systems are not good investments. Be aware of what you are investing in and act responsibly.

If you want to keep track of your fees, you also need to pay attention to the inflation rate. If the money supply in circulation increases, the price level rises with it.
The purchasing power of the currency decreases. You get fewer products or services for the same money.

Calculation example

The savings account at a house bank generates an annual profit of 1% on the deposit. At the start € 10,000 are deposited. At the end of the year, the return of 1% of €10,000 = €100 is posted. After deducting the KEST which is 25%, the new account balance is 10.075 €.

If inflation of 2% is taken into account, the amount of money remains the same. However, the purchasing power has decreased and is equivalent to only €9,900. This makes traditional investments such as call money accounts unsuitable and uneconomical as a long-term investment strategy.

On the contrary, there is deflation. In the process, the money supply in circulation decreases and the price level falls. The purchasing power of the currency increases. Economically, this can be more devastating than inflation. The value of money is rising, and so are investors' debts.

As a value hedge, on the other hand, it would make sense. Some cryptoassets are already deflationary.

Diversify your portfolio

The technical term diversification refers to the spreading of risks across several asset classes. Thus, in the event of a loss, the entire capital is not at risk. Profit and loss are divided among several positions.

A simple example.
You have invested €1000 in a single share. This decreases by 50 %. You sell the share and have a loss of 500 €.

Example two.
500 was invested in a single share. Gold worth €500 was also purchased. The share loses 50% of its value.
The price of gold is more stable and does not correlate directly with the stock market. You have limited your loss to 250 € by diversification.

There should be a balance between low-risk and high-return investments that fit your life situation and investor type.

It is always recommended to use multiple asset classes.

Summary

Checklist to invest properly

• Pay off all loans and receivables due first.
• Minimize your spending.
• Increase your revenue.
• Build a nest egg of three months' salary.
• Stay motivated and keep your goal in mind.
• Conditions at house banks are high compared to online brokers.
• If necessary, use fee consultants:inside to get professional help.
• Learn about robo advisers and their capabilities.
• Define your goal SMARTly.
• Calculate your investment amount and your monthly savings rate.
• What is the desired return on investment?
• Find out how willing you are to take risks.
• Consider your time horizon for investing.
• Find out about fees and capital gains tax.
• Be aware that inflation will hurt your return on investment.
• Always be skeptical, question and inform yourself before investing money.
• Spread your portfolio across different asset classes to minimize risk.

Use other knowledge platforms and media.

Further reading

Searching for reference books on financial markets can be costly. Below, the editors have listed several established publications that you can use for guidance.

• Investing with confidence by Gerd Kommer*
• Rich Dad Poor Dad by Robert T. T. Kiyosaki *
• The only book you should read about finance by Thomas Kehl *
• Investing Intelligently by Benjamin Graham *

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