The BEST Investment in Germany
This article explores the question if there is a best investment in Germany, detailing the benefits, risks, and tax implications of various investment options 📈.
Key Takeaways
- High-yield savings accounts offer better returns and immediate access to funds, but interest gains above €1,000 are taxable.
- Precious Metals can be sold tax-free after one year, unlike gold ETFs, making it a tax-efficient long-term investment.
- Cryptocurrencies are highly volatile; invest cautiously, as they can yield significant profits or total losses, similar to gambling.
- Individual stocks offer potentially high returns but are risky and difficult to pick; only a small percentage drives market gains.
- ETFs provide diversification and are ideal for long-term investments, minimizing risk compared to individual stocks.
- Bausparvertrag often requires lengthy contributions and low returns, making it less effective than direct property investments.
- Real estate offers significant tax benefits and potential profits but carries risks, especially with mortgages and market volatility.
- Level 1 pensions provide tax deductions on contributions, effectively giving a bonus on investments up to 42%.
- Level 3 pensions offer tax benefits on withdrawals, reducing capital gains tax, ideal for long-term investment horizons.
Introduction
One of the most frequently asked questions on finance forums is, “What is the best investment in Germany?” This is particularly common among those unfamiliar with investment options in Germany. Whether you have €1,000, €2,000, €10,000 from an unexpected windfall, €50,000, €500,000, or even €2 million, the answer isn’t straightforward. The best investment in Germany depends on three key factors: time, risk, and taxes.
The duration of your investment plays a crucial role—the longer you invest, the more risk you can take, and the more options you have. For instance, investing in the German stock market for just one year can be extremely risky, but the longer you stay invested, the higher the chance of making a profit. Taxes also significantly impact your investment, either decreasing or increasing your return. In this article, we will explore various investment options in Germany, taking into account these essential factors to help you make informed decisions about where to put your money.
Savings Account (Emergency Fund)
Let’s start with the most boring but also the most important investment: a savings account for your emergency fund. While German banks usually offer very little interest, you can maximize your returns by using calculators that show you the best savings accounts in Europe. With a flexible savings account, you can get up to 3.85% interest and access your money daily. If you’re willing to lock your money away for a year, you could earn up to 5% interest. Occasionally, banks offer sign-up bonuses, allowing you to earn up to €100 just by clicking the blue buttons in the calculator.
High-yield savings accounts are excellent for parking your money for a year or two, offering a good return with zero risk. Even if a bank goes bankrupt, €100,000 is insured by the local European government. This is why we didn’t include bonds in our list—high-yield savings accounts surpass bonds in every aspect.
Regarding taxes, every profit above the €1,000 annual tax-free threshold is taxed at 25% capital gains tax. While paying taxes isn’t enjoyable, it’s a reality. Next, we’ll discuss tax-free investments and those offering tax benefits, ensuring you make the most of your money.
Precious Metals
Precious metals like gold or silver can be excellent investments if you plan to invest for more than one year. This is because German tax authorities consider precious metals not as investments but as special assets. Special assets can be sold completely tax-free after holding them for at least one year. However, it’s crucial to be careful about how you buy your gold. Gold ETFs, for instance, are never tax-free; they are considered investments and are taxed with a 25% capital gains tax. To benefit from tax-free sales, you must buy gold physically.
Historically, gold has been a solid investment. Since 1971, when the US abandoned the gold standard, gold has had an annualized return of 7.98%. This is quite impressive, but it’s important to note that gold’s value can be volatile, with periods where it has lost about 50% of its value. This means that while gold can be a good investment, you may need to hold it for longer than a year to realize its benefits.
Now that we understand gold’s potential, it’s essential to invest in it in the most tax-efficient way possible. Our guide on precious metals explains exactly how to do this, ensuring you make the most of your investment in gold or silver.
Cryptocurrencies
Cryptocurrencies, much like gold, are considered special assets from a tax perspective. This classification means that, after holding them for at least one year, you can sell them completely tax-free. However, investing in cryptocurrencies is a highly polarizing topic. On one side, there are enthusiasts like famous fund manager Cathie Wood, who predicts Bitcoin will soar to astronomical values, envisioning it as a financial superhighway that could reach 3.8 million. Her optimism is fueled by her substantial investment, with 75 million of her net worth tied up in Bitcoin.
On the other side, you have credible economists from institutions like the European Central Bank, who argue that the fair value of Bitcoin is zero. This stark contrast in opinions highlights the speculative nature of cryptocurrencies. The truth is, no one really knows where cryptocurrencies are headed, and joining this debate can be unproductive.
One thing is clear: investing in cryptocurrencies can be extremely risky. While there is potential for significant gains, there’s also a real possibility of losing everything, similar to gambling in a casino. If you decide to invest in cryptocurrencies, it’s wise to allocate only a small percentage of your net worth. This way, you can explore the potential of cryptocurrencies without jeopardizing your financial stability. Just remember, it’s crucial to be cautious and avoid risking money you can’t afford to lose.
Stocks
Many people advocate for investing in stocks but we have some reservations. Don’t get us wrong, we are a big fan of the stock market. It’s what sparked our founder’s interest in finance and ultimately led to the founding of PerFinEx and the creation of these articles for you. The stock market is fantastic, and we are grateful for the opportunities it has provided. However, should you invest in stocks? Probably not. Here’s why.
Unlike the real estate market, the stock market is highly transparent, fast-paced, and efficient. Countless professional traders, both private and corporate, devote immense effort to analyzing and trading stocks. Some achieve impressive returns for their efforts. However, does this mean stocks offer a great return for the average investor? Not necessarily.
A compelling study from the University of Arizona examined the stock market over the past 90 years and found that 96% of all stocks essentially provided zero return. Only 4% of stocks accounted for the $16 trillion wealth creation in the stock market. The critical question is: do you believe you can consistently identify that 4% among the thousands of available stocks at the right time?
If you do manage to find these profitable stocks, keep in mind that any gains exceeding the annual €1,000 tax-free threshold will be subject to a 25% capital gains tax. Thus, while the stock market can be rewarding, the odds and tax implications make it a challenging avenue for most individual investors.
Exchange Traded Funds (ETFs)
If you have at least five years to invest, ETFs (Exchange Traded Funds) are an excellent option to consider. Unlike individual stocks, which can be risky and require extensive research, ETFs allow you to invest in thousands of different companies worldwide with just a few euros, providing instant diversification without the need for a complicated and expensive portfolio. Diversification is crucial for investment success as it mitigates risks by spreading investments across different asset classes.
However, it’s important to remember that ETFs are not immune to market fluctuations. They can experience significant drops, as seen during the 2020 COVID-19 crash when ETFs fell by 40% to 50% within a few months. Despite these risks, historical data from the German stock market shows that long-term investments in ETFs can be highly profitable.
For example, the German DAX, an index of the 40 largest German companies, demonstrates this well. Short-term investments in the DAX can be highly volatile, with potential losses of 12.3% in one year or even 44% during market downturns. However, if you remain invested for the long term, the likelihood of making a profit increases substantially. After 10 years, there have only been three years in German history with slight negative returns, and after 12 years, investments in the DAX have historically resulted in guaranteed profits.
While past performance is not a guarantee of future results, the data highlights the benefits of long-term investing in ETFs. If you want to invest for an extended period and avoid the 25% capital gains tax, there are additional strategies to consider, which we will discuss further.
Bausparvertrag
Before diving into other investments, let’s address the Bausparvertrag, a popular choice for many. We recently published a video explaining why the Bausparvertrag is often not as beneficial as banks make it out to be. Typically, banks present it as an excellent way to save for future property purchases. However, the reality is that you often have to pay into the Bausparvertrag for much longer than expected.
Our calculations showed that it can take up to 41 years before you can access the funds in your Bausparvertrag. Moreover, the interest earned is minimal compared to the costs involved. This means your money can gradually lose value over time, making it an inefficient investment. Essentially, the 25% capital gains tax on the Bausparvertrag is theoretical because it rarely generates a substantial profit.
For those looking to buy property, the Bausparvertrag often acts as an unnecessary middleman. Instead of taking a detour through a low-yield savings plan, it’s more efficient to go straight to real estate investment. Direct investment in property can provide better returns and more favorable tax benefits.
Real Estate
Real estate can be an excellent investment if you have a long-term horizon, ideally at least 10 years. One major advantage is that after a decade, you can sell your property completely tax-free. This is just one of the many tax benefits associated with real estate investment. For example, you can deduct mortgage interest, depreciation, renovation costs, and more. However, these benefits apply only to rental properties, not to homes you live in yourself. This is why we often recommend renting over buying. For a deeper dive into whether renting or buying is right for you, check out this article on the topic.
Now, let’s address the risks of real estate, which is crucial because our approach may differ from others. In Germany, real estate is often referred to as “Betongold” or “concrete gold,” implying it’s a safe investment. However, this isn’t always the case. When you take out a mortgage, the bank will ensure it gets its money back, one way or another. While many people see their property value grow and everything goes smoothly, there are instances where things can go terribly wrong.
In fact, real estate is the only investment on this list where you can lose more than your initial investment. If property values decline significantly, you might end up owing the bank more than your property is worth, resulting in losses exceeding 100%. To avoid this scenario, we recommend carefully selecting your properties. You can find our curated selection of prime German properties here. If you need personalized assistance with your investment journey, feel free to book a free meeting with us.
Pension Level 1
As promised, there’s a more tax-efficient way to invest in ETFs: Pension Level 1. This strategy allows you to deduct your contributions at your personal income tax rate, which can be as high as 42% depending on your income. Here’s how it works: when you invest €100 into your Pension Level 1 account and file your taxes, you could get €42 back from the German government. You can then reinvest this amount, effectively boosting your investment power by 42%.
This method not only shields you from immediate taxation but also provides a significant bonus when investing in ETFs. Essentially, for every €100 you invest, you’re actually can put in €142 thanks to the tax savings. Over time, this can greatly enhance the growth of your retirement savings, making Pension Level 1 an attractive option for long-term investors.
Moreover, these pension schemes typically offer various investment options, including ETFs, allowing you to diversify your portfolio while enjoying substantial tax benefits. It’s important to note, however, that these benefits come with certain conditions and limitations, so it’s advisable to consult with a financial advisor to fully understand how to maximize this opportunity.
Pension Level 3
Pension Level 3 presents a different approach compared to Level 1. While your ETFs still grow tax-free within this pension scheme, the tax benefits kick in when you withdraw funds rather than when you invest. The advantage lies in the tax rate applied upon withdrawal, which is a flat 50%. In contrast, if you were to invest in ETFs through a brokerage account, you’d be subject to the regular capital gains tax rate, typically around 25%.
These tax benefits, however, take time to fully materialize, making Pension Level 3 best suited for long-term investors, ideally until retirement age. The extended investment horizon allows for the gradual accumulation of tax benefits, maximizing the overall returns on your investments.
The choice between investing in ETFs through a broker or a pension largely depends on your investment timeline and other individual factors, as discussed in detail in this article. Generally, both options offer similar returns and entail similar risks, provided you invest in the same ETF. Therefore, it’s essential to weigh the advantages and limitations of each approach carefully before making a decision.
Conclusion
In conclusion, we’ve explored a variety of the potentially best investments in Germany, each with its own advantages and considerations. Whether you’re interested in savings accounts, precious metals, cryptocurrencies, stocks, ETFs, real estate, or pension plans, there’s no one-size-fits-all solution. The best investment in Germany depends on your financial goals, risk tolerance, and investment horizon.
We encourage you to reflect on the information provided, consider your individual circumstances, and seek professional advice if needed. If you have any questions or feedback regarding our list or if you believe we overlooked an important investment opportunity, we’d love to hear from you. Your input is valuable to us as we strive to provide comprehensive and insightful guidance to help you navigate the world of investments. Thank you for reading, and we wish you success on your investment journey.