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As in any country, expats should be concerned with beating inflation and taxes to preserve the value of their savings.
Inflation is actually a personal matter, as you must determine for yourself which inflation you want to beat. If you are a long-term immigrant, you are likely to be concerned with German inflation. If you plan to return to your home country, you might prefer beating the inflation rate of that country.
Remember that you invest for a purpose, and that this purpose is specific to you. If the purpose of your savings and investments is 100% outside Germany but you invest in any Euro-denominated assets, you are effectively making a currency bet.
Expats should be aware that German capitalism is fundamentally different from Anglo-American capitalism. Germany is a coordinated market economy, and this has direct consequences on investment opportunities for German residents. These consequences include, but are not limited to:
Inflation in Germany
The European Central Bank (ECB) is strongly committed to price stability, i.e. inflation must be below 2% over the long-term. In practice, the ECB is solely concerned with inflation throughout the Euro-zone, which is nothing more than an aggregate. Member States may deviate from the Euro-zone average, sometimes strongly. However, Germany is unlikely to deviate much from the Euro-zone aggregate for the German economy accounts for too large a share of the Euro-zone economy.
Germany, because of its coordinated market economy, tends to have a below-average inflation rate. Things may get different in the aftermath of the Euro-zone crisis. At present, German inflation (1.4%) exceeds the Euro-zone average (1.1%).
For more information on monetary policy, see Foreign Exchange for Expats in Germany.
Savings accounts are risk-free. German deposits are guaranteed by the federal compensation scheme (Entschädigungseirichtung deutscher Banken GmbH) up to €100,000. The guarantee covers current accounts, savings accounts, and term deposits, if they are denominated in Euros or another EU currency.
Easy-access savings accounts generally have a low yield (around 1.2%), which is often below inflation. Term deposits will hardly get you any higher yield.
German Government debt is also referred to as “Bund”. It is risk-free, i.e. Germany will not default on its debt. On the downside, Bunds offer a poor yield.
Excluding taxes and capital gains, Bund investments need to have a maturity of at least 10 years in order to match inflation (October 2013 figures). As inflation is currently at low levels (1.4%), one could reasonably expect it to return to the ECB’s 2% target over the foreseeable future.
Government bonds are subject to market variations. Bond prices rise when the market demands a lower yield, and they shrink when the market demands a higher yield.
Consequently, there is some capital gains potential if you expect interest rates to be lower in the future. If rates rise, you would likely lose money, either through a direct capital loss, or through failure to benefit from higher future interest rates if you wait for bond redemption.
Market interest rates are strongly dependent on global macroeconomic factors. Typically, they should move downwards when the global pool of money grows much bigger, whereas they rise when global liquidity dries up.
German securities (costs)
Do consider carefully the applicable transaction costs if you wish to trade securities in Germany. Here are the main costs you should be aware of:
There is no financial transactions tax (FTT) at the moment. However, Germany is known to be favourable to the introduction of an EU FTT in the future. Online stockbrokers may charge cheaper fees than high street banks. For an overview of the German online stockbroker market, click here.
German shares (overview)
Germany’s main index is the DAX30. German share prices have soared over the past decades, and they have largely recovered from the 2008 turmoil and the Euro-zone crisis. This long-term rise is largely due to the combined effect of inflation and lower interest rates. In other words, the dividend yields currently offered by the market are historically low, but they reflect today’s market interest rates. As it is largely possible to find DAX30 shares with a dividend yield in excess of 4%, German shares aren’t really overpriced.
Be wary of volatility when you invest in securities. Volatility is heavily dependent on the underlying risk. However, higher risk normally means higher reward, and some securities may be low-risk. Additionally, stock market variations are very dependent on interest rates. If they are going up, stock prices should go down. At the moment, German interest rates are at record low levels, but they might rise if the ECB tightens monetary policy. See Foreign Exchange for Expats in Germany.
You are responsible for deciding how much risk you want to take on. There is no set answer to this question, as this largely depends on your personal circumstances. A qualified wealth manager may assist you regarding this matter.
On the stock market, your emotions are your enemy. You must control them rather than let them control you. Do not, under any circumstances, let (natural) psychological factors make you take irrational decisions.
From a financial point of view, the real return on investment consists of:
When a company reinvests its business profits, the net dividend yield is lower but this may be offset by higher potential for capital gains over the long run.
Technically speaking, an investment can be highly profitable despite low coupon/dividend yields if the interest rate demanded by the market edges further down.
FX risks for expatriates
As an expatriate, you don’t necessarily want to be a speculator. If you park your money in a currency which you eventually intend to spend, you have little FX exposure. Otherwise, you are effectively making a currency bet. A lot of money can be made on currency bets, but a lot can be lost as well.
Sue is an Australian citizen who has been posted to Düsseldorf for two years. She will return to Australia later on.
Her net salary is €50,000 per year, but she intends to spend only €20,000 per year. She thinks it would be appropriate to save an additional €10,000 for a rainy day whilst she is in Germany.
Sue is effectively making a currency bet if she fails to convert 50,000*2 – 20,000 *2– 10,000 = €50,000 into Australian dollars.
Overseas investments generally
If you wish to invest in overseas assets, there are a few points you need to check, such as:
Retaining overseas assets might be helpful if you plan to return to your home country. That should spare you the money transfer hassle.
For more information on offshore investments, see our section on alternative investments.
The first thing to check is your residence status for tax purposes. See TAXATION – Overview of Tax Issues for Expats in Germany.
Your worldwide investment income is taxable in Germany if you are resident in Germany for tax purposes. If you have non-resident status, you are liable to tax on your German-source income only.
For more information on investment taxation, see TAXATION – Investment Taxation for Expats in Germany.
Sections in FINANCIAL CONSIDERATIONS IN GERMANY:
» Money Transfers for Expats in Germany
» Foreign Exchange for Expats in Germany
» Banking for Expats in Germany
» Pensions for Expats in Germany
» Investment for Expats in Germany
» Wealth Management for Expats in Germany
» Property Investment for Expats in Germany
» Insurance for Expats in Germany
We value input from our readers. If you spot an error on this page or have any suggestions, please let us know.
If you are considering moving to Germany or are soon to depart, you can find helpful information and advice in the Expat Briefing dedicated German section including; details of immigration and visas, German forums, German event listings and service providers in Germany.
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Working in Germany can be rewarding as well as stressful, if you don't plan ahead and fulfill any legal requirements. Find out about visas and passports, owning and operating a company in Germany, and general German culture of the labour market.
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