Our parents’ generation gave us a lot of good advice. But also a lot of well-intentioned advice that we shouldn’t necessarily adopt. Here are ten financial tips that you shouldn’t imitate.
What distinguishes our parents’ generation from us
The baby boomer generation refers to the generation born in the two decades after the Second World War. For many in the financial flow community, this is their parents’ generation. But the term “boomer” also generally refers to people the same age as our parents, regardless of which generation they come from.Play
Baby boomers are the post-war generation that was spared the misery of the war and was able to experience the post-war boom. After the war, the economic miracle was a major upswing and the generation had the best conditions to build up a fortune. Nevertheless, the period was marked by a number of crises , such as two oil crises, two Gulf Wars, Black Monday and the bursting of the dot-com bubble.
This generation saw the consequences of the Second World War lived out by their parents. Material security is particularly important to this generation. A home of their own, a solid job and a good income are things that this generation strives for. The term workaholic, for example, comes from this generation: many worked a lot and hard to build up this material security. Work was the main focus and people identified strongly with their jobs. There was also a certain frugality and sometimes stinginess. People could afford a lot of wealth that they built up through hard work, but nothing was wasted.
You should not rely on these financial tips
We have selected ten financial tips for you, some of which made sense in our parents’ generation, but should no longer be relevant for subsequent generations.
Riestern is the best option
The Riester pension was a political attempt to strengthen private pension provision. The fact that there is increasing political discussion about abolishing it or replacing it with a new model shows that the Riester pension has failed.
This is how the Riester pension works: For the Riester pension, you take out a Riester contract, for example with a pension insurance policy. It is also possible to take out a Riester fund savings plan, which is saved like an ETF savings plan. In addition to the return, which is paid out together with the saved assets when you retire, you also receive state funding.
However, one weak point of the Riester pension is the so-called capital guarantee. This means that at least the payments and the state subsidy must be guaranteed when the pensioner retires. While this sounds good, pension insurance companies are forced to invest the assets with relatively little risk, meaning that only very little return can be generated.
In addition, Riester contracts can incur high fees. According to a study by Ökotest, the fees for some contracts are even higher than the state subsidy.
What you should do instead: You can do what the bank or insurance company does with your money: The deposited assets are often invested in (government) bonds or equity funds. Using appropriate ETFs, you can also invest the money yourself in this way and determine your own risk-return ratio. This way, you can forego government support, but you can get a much more attractive return.
Stocks are only for the rich
The image of a shareholder in the boomer generation is usually a rich man in a suit with a big car. Not a man or woman like you and me. The stereotype of a shareholder has too much money to spare and gambles with it like in a casino.
You can’t afford to buy a share financially if you don’t have much money.
In reality, shareholders carefully research companies and entrust their money to them because they believe in the future of that company or even of an entire market. Many shareholders do not invest play money to gamble, but rather their hard-earned savings in order to invest them profitably in the future. Those who invest do so with a long-term perspective and are prepared to be invested in one or more companies for a very long time. You don’t have to be rich to do this. You can invest in stocks with even small amounts of money.
The boomers are right that stocks involve risk. But it is precisely this risk that should be exploited: because a higher risk also enables a higher return. Particularly over a long time horizon and if you diversify your investment broadly enough, you can optimize the risk to your own advantage. Returns are essential for wealth creation because of the compound interest effect. Stocks are a helpful way of providing for the future even with little money.
The Dotcom Bubble
The skepticism towards stocks is probably mainly due to the fact that many people simply do not think it is necessary to think about this asset class. In addition, access to the stock market used to be much more difficult than it is today. Things that can now be done on the move using a mobile phone for a small fee used to be much more expensive and complicated.
The dotcom crisis is making things even more difficult. At the end of the 1990s there was already a stock market hype, just like we are experiencing today. Suddenly, many people bought shares for the first time and took their first steps on the stock market. But then the dotcom bubble burst, and many new shareholders suddenly suffered large losses and feared for their assets. The Telekom share, known at the time as the “people’s share”, for example, never managed to reach its all-time high again. This was a painful lesson for many, who then stayed away from shares even more.
What we are doing better today
What the generation did wrong during the dotcom crisis: They relied too heavily on individual stocks and did not diversify their investments sufficiently. And after the dotcom bubble burst, many sold out of panic and took losses, instead of seeing the crisis as an opportunity to buy more cheaply and hold out.
A house is the best investment
Or: “Buying is better than renting” or “the house cannot lose value”.
In the eyes of the boomer generation, anyone who owns their own home has made it. A house supposedly cannot lose value and is therefore a solid investment. People would rather pay off their own mortgage than pay rent to their landlord.
Theoretically, a house can fluctuate in value just like a share. However, you don’t notice it at all with a house, because a price is only ever determined in one transaction. This only happens very rarely with a house. The fact that you don’t know the value of your property at any point in time doesn’t make the investment any safer or more profitable. Anyone who invests all of their assets, or at least a large part of them, in a single property is taking on an enormous concentration of risk.
But how can you possibly suffer a loss if you simply live in the property rent-free and have no intention of selling it during your lifetime? Even if the loan is completely paid off, a property is not completely free. In addition to operating costs (which of course also apply to rental properties), you also have to invest regularly in a house or condominium to maintain the property.
Whether renting or buying makes more sense depends on many factors. Among other things, the alternative to buying: The alternative to buying property is not just renting. If you are a tenant, you can also invest assets in the stock market. For owners, however, paying off the loan should take priority. Play
My financial advisor said…
Or: “I have known this consultant for years. He will give me the best offer.”
Many banks, insurance companies and other sales outlets offer free financial advice. Many advisors also recruit their customers from their own circle of friends and acquaintances. This quickly leads to the idea that this is a win-win situation for both sides: the financial advisor supposedly only wants the best for his customer.
Of course, the money that a financial advisor earns from his advisory business doesn’t just fall from the sky; instead, he receives a commission for successfully selling a financial product. This in turn comes indirectly from your invested assets and is deducted from your return in the form of fees.
This means that a financial advisor is not neutral and there is a conflict of interest between you and a financial advisor. On the one hand, you want to be offered a product that will give you a decent return. And on the other hand, the financial advisor wants to receive as high a commission as possible, which is deducted from your return in his favor.
Therefore, it is better to either educate yourself financially and understand the products you are investing in. Alternatively, you can pay a so-called fee-based advisor. They do not receive a commission, but are simply paid by you on an hourly basis.
Of course I need this insurance
Our parents’ generation may be a very frugal generation, but they have nevertheless often taken out a lot of unnecessary and expensive contracts – including some insurance policies. The need for material security of this generation is also reflected here.
Most insurance policies, however, are not needed and are usually a loss-making business for the insured. In order to weigh up whether insurance makes sense or not, you should first ask yourself whether the worst-case scenario could ruin you financially in the long term. If you can answer this question in the affirmative, then the insurance is worth it. If, on the other hand, you come to the conclusion that a claim is annoying and painfully expensive but does not mean ruin, then you should not take out the insurance.
What exactly this financial “ruin” is is of course very subjective and depends greatly on one’s own life situation. Someone who supports an entire family with their income certainly has a very different need for security than a single person living alone.
My money is only safe in the savings account
In the past, there were actually times when you could get interest rates of between 5 and 10% on savings accounts. But most people probably did this calculation without taking inflation into account. Because if you look at real interest rates, i.e. interest minus inflation , then the whole thing has looked like this since the 1970s:
So the money in the savings account could not really grow for most of the time, because the real interest rate was negative in many periods, despite generous interest rates due to the sometimes quite high inflation.
The annual real returns of the MSCI World Index – i.e. the inflation rate has been deducted – fluctuate significantly more than the real returns for savings deposits. But overall, it was possible to achieve a much higher average return.
Next, let’s look at what would have happened to €100 if you had either put it in a savings account in the early 1970s or invested it in an ETF on the MSCI World.
Adjusted for inflation, the €100 would have lost a little of its value, while the amount in the MSCI World ETF would have multiplied.
Even in a savings account, your assets are subject to fluctuations in “real” terms, i.e. when inflation is taken into account. The security that a savings account suggests is only an apparent security: in reality, you lose purchasing power through savings. At least a savings account protects you from too great a loss in value. Instead of literally putting your money under your pillow, it is at least better off in a savings account.
You don’t talk about money, you have money
Money is a well-kept taboo subject in Germany. Unlike other countries like Sweden – where all tax returns are publicly available – we Germans are very reluctant to talk about money.
Why should we talk about money? If you are completely unclear about how much friends, family members or people in comparable jobs earn, you are also completely in the dark about how much you yourself should actually earn and how much you should ask for in a salary negotiation.
If, on the other hand, you talk to friends about salaries, you will have a better idea of how much you should earn for what work. The topic of investing should also be transparent, because this way you can compare yourself and become aware of better investment methods, for example. This may also remove the hurdle for friends to deal with the topic.
The motto “we don’t talk about money” applies not only among friends and acquaintances, but also in partnerships:
My partner already takes care of the money
Also very common in our parents’ generation: the partner takes care of the finances exclusively. According to a study by Consorsbank, only 59% of those surveyed know how much their partner earns. That means 41% don’t know what their partner earns.
In a partnership or friendship, you are constantly confronted with financial decisions, even in the smallest of ways. When you book a vacation together, go out to eat together, or share in a gift together, you always have to assess the other person so as not to overburden them financially or put them in an uncomfortable situation. Even such small things can lead to imbalance and resentment. In a life partnership, on the other hand, you are confronted with much more important financial decisions that you have to make together.
If you talk openly about money in a relationship, it creates trust. And even if both partners earn very different amounts, being open about money creates balance and understanding.
Of course, it’s perfectly fine if one partner enjoys managing the shared finances more than the other. But at the very least, both partners should be aware of everything and make financial decisions together.
If you want to make solid provisions, take out pension insurance
Pension insurance can indeed be an alternative to do-it-yourself retirement planning with stocks or ETFs. And yes, it is correct that in case of doubt the pension insurance would even do exactly the same thing: it invests your contributions in funds and/or stocks spread around the world.
A pension insurance can also help to reduce the so-called longevity risk. This means that if, contrary to expectations, you live significantly longer than expected, the pension insurance could, depending on what is contractually agreed, cover this longer life span, while your own savings might already be used up.
In recent decades, pension insurance has indeed offered very high returns, so this boomer tip was not entirely wrong. But times have changed.
If your pension insurance invests your contributions in shares or equity funds, the hurdle to simply taking this investment into your own hands is now much lower. This saves costs and ultimately leads to a higher return.
Pension insurance policies that promise a guaranteed pension usually have very low returns and are therefore not recommended.
Legally, there is also a significant difference between your own portfolio and a pension insurance policy: if you buy shares or units in a fund, they are essentially your property. The custodian bank simply holds them for you. If the bank goes bankrupt, these units are still your property and cannot be liquidated.
It is different with a pension insurance: Here you only have a contractual relationship with the pension insurance company and the fund shares that it acquires do not belong to you. If the pension insurance company goes bankrupt, your assets would theoretically be gone. The statutory deposit protection for bank deposits does not apply here either. Instead, there is a joint security fund (Protektor Lebensversicherungs-AG) that would then step in. However, it is questionable whether this could handle all of these assets in the worst case scenario, in which, for example, a series of insurance companies go bankrupt.
The pension is secure
A myth that has actually been debunked for a long time: that the state pension will finance you in old age. It is already clear to the boomer generation that their pension will not be enough, as there are too few young people who can finance this pension.
The statutory pension is a so-called pay-as-you-go pension. The contributors, i.e. those who are currently employed, finance the pensions of the generation that is retired. This works when there are significantly more employed people than retired people. The baby boomer generation was therefore easily able to finance the pensions of their parents or grandparents. But then it was no longer enough for their own pension: birth rates fell and life expectancy increased.