The 4 Biggest Mistakes Young People Make With Money

This is a translation of an article that originally appeared on June 2, 2023.

Gerd Kommer is a German investment banker, entrepreneur, and author. He is known for his critical stance towards active investment strategies. He advocates a full reliance on ETFs (Exchange Traded Funds).

Kommer has published several books, including "Investing Sovereignly with Index Funds and ETFs" – a bestseller in Germany. He advocates for a long-term, cost-effective, and risk-diversifying investment strategy based on passive index funds.

Kommer began his career in the financial world as an analyst for a consulting company before working in banks in Germany, South Africa, and the United Kingdom. Prior to founding his own company, Gerd Kommer Invest GmbH, he led an asset management company in London and was responsible for approximately 16 billion euros.

Insider asked Kommer about the biggest mistakes young people could make with their money.

Believing that wealth can be built through interest-bearing bank deposits is wrong, Kommer said. "If you deduct inflation and taxes, then in the past 120 years in Western countries, you have never been able to build substantial and lasting wealth with interest-bearing bank deposits," he added.

With interest-bearing bank deposits, at best, you can preserve existing wealth, but even that will not be possible over many decades due to inflation, leading to a real shrinkage of wealth, Kommer continued.

A capital-building life insurance policy is a form of life insurance where the policyholder pays regular premiums and, in return, receives a guaranteed sum at the end of the term.

Kommer warns against this type of life insurance. "Its return is too low, and its risk, which is difficult for laypeople to recognize, is too high," he said, adding that the returns on capital-building life insurance policies are often low because a large portion of the premium payments is used for administrative fees and insurance coverage.

There is also the risk that the insurance company may encounter financial difficulties, endangering the guaranteed payout, Kommer added.

It is "very, very unlikely" you will "quickly and almost effortlessly" become rich by gambling or speculating as an employee with stocks, certificates, cryptocurrencies, or derivatives, according to Kommer.

Gambling on the stock market carries significant risks, as financial markets are influenced by various factors beyond individual control. Even experienced traders can suffer substantial losses.

The only "reasonably reliable" route to wealth is work, "excluding the alternative routes of inheriting a large fortune, receiving a large gift, or marrying into wealth," Kommer added.

Young people often live from paycheck to paycheck without a defined savings plan. But Kommer said it was important to save regularly.

The earlier one starts investing in retirement savings, the better, he said, as the compounding effect over time can result in a substantial sum.

Kommer advises young people to invest at least 10% of their net income each month. "For those who start with retirement savings at age 45 or later, 10% probably won't be enough," said Kommer.

This post originally appeared on Business Insider Deutschland and has been translated from German.