Even though it’s rarely talked about, money is very important in Germany. And there’s one question about money that we are all tacitly interested in: How and where can you best save money in Germany?
Here’s a hint – diligently saving your money, only to then put it into a savings account, is not the best way to grow your wealth in the long term. Later in this article, we will tell you why that is so, and how you can invest your Euros to make them grow in the future. But first, let’s talk about getting those savings piled up in the first place.
Germans are European champions in saving
On average, people in Germany gross EUR 3,800 – 4,000 per month. That’s a lot of money – even after deduction of taxes and social security contributions. This level of income puts Germany in 19th place internationally.
On the other hand, Germany has a high cost of living, which is a burden especially for people with lower incomes. In many cases, housing costs account for around 50% of low-paid workers’ salaries. This means less money left at the end of the month.
Source: Statistisches Bundesamt, Arbeitsmarkt auf einen Blick – Deutschland und Europa, 2018
Generally speaking, rents in the cities are much higher than in the countryside. Moreover, the wealthier a region is, the more expensive the rents are going to be. It doesn’t come as a surprise then that the three German cities with the highest average rent are the three economic centres – Stuttgart, Frankfurt am Main, and Munich.
This means that how much money is going to be left at the end of the month strongly depends on where you live. This applies not only to your rent but also to other factors determining the cost of living – these can vary widely within Germany. In general, it is cheaper to live in East Germany than in West Germany.
Although many households could increase their cash flow by moving to a different region of the country where taxes and housing costs are much lower, even just moving to a neighbouring community could be worthwhile – since taxes, rents, and costs of living also vary in different areas within one German state.
Despite the high cost of living, accumulating savings in this country is relatively easy. According to the German DZ Bank, people in Germany are saving more money than ever before. The current rate of saving in Germany is at 16% in comparison to 10.9% in 2019.
This means that people in Germany are saving on average EUR 16 per every EUR 100 earned. This is a peak value. According to the German Federal Office for Statistics, it’s the highest savings rate in Germany since the German reunification.
Of course, how you save your money varies a lot from person to person. Still, the majority of people in Germany continue to place their bet on the classic saving strategies. This means that most of the money saved in Germany goes to savings accounts in banks – but is this really profitable?
The answer is no. It is a misbelief that the money saved in a bank account is going to increase its value over time. The actual reality is that interest rates for banking accounts currently range around 0.01% or lower. The combination of low returns and rising inflation makes sure that money in savings accounts is in fact losing its value instead of increasing it.
On top of this, more and more German banks are passing negative interest rates on to savings accounts. This means that you have to pay interest for depositing your money in the bank account. This particularly applies to smaller German banks.
The main reason for this is the monetary policy of the ECB (European Central Bank). The objective of the ECB is to attain Europe-wide inflation of 2%. In order to accomplish this goal, the ECB sets a very low interest rate for bank deposits. With the low rates and other economic tools, the ECB wants to encourage consumption, which should then in theory increase inflation.
But because the ECB has been missing its goals for years, there is no end in sight for the low-interest-rate policy. Quite the contrary, the ECB is right now considering decreasing interest rates even further. This in turn means that savers in Germany will get even less interest on their savings in the future.
This leads us to the following question.
What are the best ways to save money in Germany?
The two most effective ways to save money are:
- Saving money in everyday life
- Utilising the right investments
But why save money in the first place?
Whether it’s for a vacation, a planned investment, your retirement, or a reserve for hard times, it is never a bad idea to have a few Euros on the side. Your motivation to save money will increase if you keep your goals in mind!
Before we deal with the investment options that make the most of your assets, we want to first take a look at how you can save money in everyday life.
The best tips for saving in Germany
Put money aside at the beginning of the month
If you wait until the end of the month to set money aside, you will soon realise that this may not be a successful strategy. It’s too easy to lose sight of your overall spending, particularly when you have money in your account. All at a sudden, you’ll find your account empty, without having set aside a cent in savings.
We recommend automating this process by setting up a monthly transfer for each payday. Starting off with a lower balance in your day-to-day account, you will plan the month ahead better and avoid unnecessary spending. More than half of all Inyova customers use our monthly plan, in which a small amount of savings automatically moves into their investment every month.
Create a budget
It turns out that many people spend all their money each month without knowing where it all went afterwards. The only clear thing is that the account is now empty!
To avoid this scenario, it’s worthwhile to create a budget that keeps track of your income and expenditure. Sure, budgeting does not sound like fun for most of us – fortunately, there are technological tools that make it easy and pain-free.
Good apps include “Spending Manager – Tracker” and “Household Book: Money Manager“.
Of course, you can also keep recording your expenses in a notebook. Choosing the method for tracking expenses is entirely up to you. The essential thing is that you track them in some way. You can only recognize your savings potential and create a successful savings plan if you know exactly what your expenses are and where the money is spent.
Avoid spontaneous purchases
Online and in the real world, advertising can be very enticing – it often results in people making unplanned purchases.
A great trick is to set a price limit for spontaneous purchases in advance, for example, EUR 50 per purchase. For items that exceed this value, write down what you would like to buy, wait, and consider it again after a week. It’s always interesting to see if the desire and the need for the product are still there – you’ll see how many times you’ll have forgotten about both the note and the product after a week.
Put coins aside
With this tip, you’ll relieve not only your conscience but also your wallet. Hardly anyone likes to carry loads of coins around,but then when paying, you often forget to pick the exact amount to get rid of the annoying weight anyway. What results is even more spare change!
So why not leave all the coins at home? If you ‘feed’ a piggy bank daily, your savings will quickly add up (especially in Germany, where just a handful of coins can be worth EUR 30!). The best part about this method is that you save money without compromising on anything – aside from the extra weight in your wallet!
Smarter shopping
Grocery shopping is a great place to save money. But don’t worry, we aren’t going to suggest changing what you buy – only when you buy it! Remember: The best discounts happen just before closing time. Around one and a half hours before closing, many supermarkets offer fresh products such as meat, dairy products and sandwiches up to 50% cheaper. It is especially worthwhile to do your weekly grocery shopping late on a Saturday, as many supermarkets want to get rid of the products before closing for Sunday.
Compare insurance premiums
With this tip, you can save several hundred Euros per year, without receiving less healthcare. Simply use internet calculators to compare your basic health insurance premium and determine whether your insurance is still among the best offers. The same applies to car insurance and life insurance.
When changing your insurance, pay attention to the notice period stipulated in your insurance contract. For example, the notice period for your health insurance in Germany is two months. For car insurance, the notice period varies from one to three months, depending on the provider.
Cancel unused subscriptions
From time to time, you should go through all your subscriptions and check if you still need them. It’s just too easy to subscribe to something for a few Euros and then forget about it. These subscriptions add up fast, having you unnecessarily spend a lot of money each month. Therefore, check your subscriptions and see if you can save some money there.
Save railway costs
In Germany, we love taking the train. After all, 2.6 billion passengers travelled on German trains in 2019 alone. Here too is an opportunity to save some money.
If you regularly travel longer distances by train, purchasing a Deutsche Bahn annual pass could save you quite a bit of money. As a daily commuter, you can save money by getting a monthly pass as opposed to buying single trips. Deutsche Bahn estimates that a monthly pass will pay off if you only make as few as ten journeys a month.
Save money by investing properly
The money that people in Germany save usually ends up in a savings account of a German bank. But is that the right way of doing it?
As we discussed at the beginning of the article, it’s a misconception that money in a savings account will multiply over time. Today, interest rates of less than 0.01% are normal. At the same time, rising inflation means that the money you put into your savings account is losing value over time.
This makes investing an attractive alternative. But there are two sides to this argument – on the one hand, a good investment brings more income, but on the other hand, it comes with a higher risk of losing money.
The following three are popular options for investing money:
- Real estate
- Index funds
- The stock market
Investment in real estate
While everyone was rushing to invest in real estate a few years ago, the tide has turned, with high prices causing many people to question the underlying value of real estate investments.
In some cases though, buying a home that you will live in continues to be a worthwhile investment – especially since interest rates on five-year fixed-rate mortgages are currently at an all-time low.
At the same time, the price for real estate in Germany is still rising – for the eleventh year in a row. This trend can be seen throughout the whole country, in all German regions. Such an enormous price growth gives rise to concerns about a real estate bubble that is just about to burst.
There is another reason why real estate isn’t an unproblematic investment. After deducting maintenance and other costs, the real profit of such an investment stagnates on a low level.
Investing in stocks and index funds
When investing in the stock market, you should always take a long-term view. Stock prices are constantly changing, and there’s a chance that you will lose money if you withdraw your investment at the wrong time. On the other hand, the advantage of most equity investments is good liquidity. If you really need your money back in a hurry, you can sell your shares and have the cash within a week.
If properly managed, the stock market offers good profit expectations, compared with the savings accounts of major German banks. Exchange-traded funds (known ETFs) are currently in vogue, offering beginners a way to easily and conveniently participate in the stock market. However, one drawback of ETFs is that you are forced to buy a bundled set of stocks and can’t select or eliminate specific companies from your investment. This lack of flexibility is especially important for investors who want to determine what companies they invest in, and what their individual risk profile should look like.
In funds, the distribution of the profit depends on the average performance of your package. A recent study carried out by Quirin Privatbank showed that there are large differences in the returns of ETFs and that millions of dollars in profits are lost every year.
Caution should also be exercised with regard to transaction costs and taxes. At Inyova, there are no hidden fees – transparency is essential to us.
Then why doesn’t everyone invest?
As mentioned earlier, investing in the stock market comes with a risk – even the best experts can find themselves in the midst of an unpredictable crisis. This risk factor stops many people from investing their money in stocks, although with the right management, everyone can find an appropriate balance between risk and return. Of course, when investing in equities, there is a correlation between the level of return and the risk you have to take. So, if you want to be on the safe side, you can’t expect a huge payout down the track.
One of the most important rules in the stock market is to diversify your investment. This means that instead of putting all your eggs in one basket (or all your money into a few companies or industries), you spread your investment across a range of factors. The idea behind diversification is that losses in one area are often offset by profits in another.
In practice, Inyova believes that your investment should be split between at least 30 different stocks. Your investment should also be spread across different industries, countries, currencies, and company sizes to minimise the risk you carry.
Depending on how long you want to tie your money into an investment, it is also worth considering splitting your investment between stocks and government bonds. While equities may fluctuate quickly in the short term, they offer better long-term returns. The advantage of government bonds, on the other hand, is that they are hardly susceptible to fluctuations and are therefore more suitable for short-term investments. Naturally, they also have a smaller profit distribution.
Can I invest too little money?
Now you may think, “That sounds great, but isn’t the stock market only for those who have large sums available?”
Although this rumour persists, it is actually a misconception that only large amounts can be invested in the stock market. There are also opportunities for investors on a smaller budget to invest in equities.
The minimum for a good investment base is around EUR 2,000. But even for those who have a budget smaller than that, there are possibilities as well. With Inyova, you can start with as little as EUR 100 if you decide to set up a monthly savings plan.
Saving money made easy
In summary, there are easy ways to save money in Germany, without making significant changes to your lifestyle. But while it is good to implement these easy ways of saving money in your everyday life, it’s also important to think about investing, so that your money will grow over time.
Would you like to see what your Inyova investment might look like? The first step is to get your personalised impact investing strategy – it’s free and non-binding. Using our easy online tool, you can pick investment themes based on your personal values and interests. We will then show you exactly what stocks you could invest in. From there, the Inyova Engine will create a personalised investment strategy for you to consider. This is completely free and non-binding.
