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Since I started my first job after graduating a few years back, I always saved a certain percentage of my salary each month on an extra savings account my bank offers. At that time, and until recently, that seemed to make sense.

Now I have, in my opinion, saved a lot of money and I'm thinking whether or not to stop putting more money into the savings account and instead use the money to invest.

My thinking is, if I got a certain amount saved and I'm sure I won't need to use it completely in an emergency (buy a new car if mine broke for example), why put even more money in the savings account instead of investing it and (hopefully) make more money with that?

I'm currently wondering what is a good point to stop saving. Should I stop at all? To clarify: I'm considering saving (setting aside some money on my savings account) and investing (actually doing something with the money, like buying estate, stocks, etc.) two different things.

To address further information: I'm currently not in debt in any way nor do I have to pay a student loan. I got a steady income every month and, apart from wanting to move out soon, I'm not planning on spending any huge amounts of money.

Regarding some comments, I'd also like to add that I'm also already paying into a employer-funded pension (correct me if this is the wrong english term for it), which should give me a nice pension on top of the governmental pension, which seems not to be sufficient enough anymore until I'm able to retire in about 40 years (heck, it does not seem to be sufficient enough anymore already today). But I'd also like to invest the money I got left to some degree, because otherwise it would just lay around useless.

Suimon
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    Welcome to Personal Finance SE. Also, if any, include your future financial goals. Do you want to purchase a home soon? Do you only want to invest for future welfare? As well as some details, like do you have employee matching option benefits or outstanding debts(at which %)? – Leon Apr 15 '19 at 06:43
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    Not enough rep for an answer, and most I would have said is said already, but I'm missing one thing I think is worth mentioning: If you haven't already, you should consider buying a house. Most small time investors I know will determine a ratio like for instance 40/40/20, meaning 40% real estate, 40% risk carrying (stocks etc), 20% low risk (cash, savings etc). When "new" money comes in, they apply their ratio to determine where it should go. (Real estate would be the already paid portion of your mortgage). The bonus is that you get to live in your investment! – Douwe Apr 15 '19 at 14:13
  • "apart from wanting to move out soon". Are you still living at home? I would focus on learning to live on your own before doing any significant investing. – chepner Apr 15 '19 at 15:11
  • @chepner My bad, poor choice of words. I'm currently living alone and planning to move into a bigger apartment together with my SO some time this year, which would put me at a higher rent. – Suimon Apr 15 '19 at 16:43
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    @Douwe I don't really understand your reasoning behind saying "just buy a house first". Why would I do that? Or do you mean like invest in a buildings saving contract? – Suimon Apr 15 '19 at 17:00
  • @Suimon Diversification is key to mitigating risks when it comes to investing and real estate is almost always part of the package. Since you do not own a home yet (I see now in your edit) it usually would make sense to acquire one as it is A. usually a sound, semi-low risk investment, B. will turn a part of your expenses from consumption (rent) into investment (paying off mortgage) and C. Give you a place to live. If you were dutch I would add D. The government subsidizes a part of your investment, but I think the options are more limited in Germany. I would certainly look into it though. – Douwe Apr 16 '19 at 10:35
  • @Douwe to the best of my knowledge and depending on the area, as some, in particular, have greater issues the real estate market in Germany is very highly valued right now. Doubt its better, talking investment wise, a choice than other options proposed. Obviously, if OP wants to get a house for their own reasons that's entirely fine but I wouldn't call that an investment. – Leon Apr 17 '19 at 06:01
  • @Leon, in the short term, sure it might be better to wait if market conditions aren't favorable. In the long term, paying rent for 30 years vs building equity for 30 years is a no-brainer investment wise. Also, other markets like stock are highly valued right now too. If this value is too high is anyone's guess, otherwise we'd all go short wouldn't we? – Douwe Apr 17 '19 at 08:30

5 Answers5

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Given your specific situation, being debt free and in Germany where there are supportive social structures in place for potential unemployment etc, I would consider the following:

  1. Depending on your industry and how easy it is to get a new job if suddenly let go, have a small emergency fund. Nothing fancy needed especially if you live in a city where public transportation is running well, and you won't be needing a car if you even own one currently. For instance, as a software engineer in a country with unemployment benefits in a city that has adequate public transports anything more than 1-2 months of wages would be excessive.
  2. Time to use all these existing funds currently idling in your savings account. To put it into perspective you gain at most negligible amounts (to the tune of 0.30% according to Google) where inflation eats into that balance about six times as fast (at a rate of around 1.8% for 2018). While this is better than nothing, this is clearly not a very good use of capital. If you plan to get a downpayment for your own house soon then, by all means, this is fine. If not you need to make your money work for you. Investing in ETFs seem to be the reasonable thing to do here, since you diversify and you invest in the long term prosperity of the whole market instead of trying to gamble with specific companies that may or may not exist when you retire and will eat your time trying to manage actively.

If you're fine with their fees (which can eat into profits over time but in exchange you need not to lift a finger managing your investments), you can use an online robo-investor platform like etfmatic.com that accepts German customers to create your goal and start your journey. They will automatically choose a balance of EU/US/JPN/developing countries mix for you, and you can also put forth specific goals like possible retirement dates, risk exposure, etc while rebalancing your portfolio automatically to keep it within your specified goals. I find an 80% equity 20% bonds a reasonable long term portfolio allocation, but you can even go for a 100% allocation with a retirement date set, so they can adapt your portfolio to a more risk-averse allocation the closer your retirement goal date nears.

Earth
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Leon
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  • You should optimize your savings as well. You should be able to get ~3% returns in a high-interest savings account, and still be able to withdraw money within a day or two if necessary. – Cain Apr 15 '19 at 15:12
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    In the US we usually recommend 3-6 months of wages as an emergency fund. Is your lower requirement because Germany has a much better social safety net? – Barmar Apr 15 '19 at 16:28
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    The amount of buffer you need should be based on your expenses, not your income. – JimmyJames Apr 15 '19 at 17:20
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    @Cain, I think you have a very US centric perspective. It is not possible to get a ~3% interest rate account in Germany. To put thinks into perspective: Unlike in the US, German government Bonds have a negative interest rate. Investers who want to invest in "safe" German bonds have to pay to do so. Banks don't have the option to easily make your money work for them, the costs are hand down to costumers. – MarvMind Apr 15 '19 at 18:07
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    @Barmar Having lived and worked in both the US and Germany I do think that you do need a larger emergency fund in the states. The much saver social net is one aspect. Medical bills are not really a think in Germany and if you suddenly use job or have an accident you will 60% of your wage as public benefit for 24 month. The second aspect is the availability of public goods like transportation. As mentioned in the original answer you don't need a car in German cities. Similarly, if your washing machine suddenly breaks you can just go to the nearest washing salon, 10 min foot-walk (In cities). – MarvMind Apr 15 '19 at 18:29
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    @Cain I know of such accounts in the USA, Germany or some other EU country, none that I am aware of. – Leon Apr 16 '19 at 06:51
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    @Barmar if you don't quit your job and are fired or let go, then the state will pay you 70% of your net salary for up to 1 year, with the condition that you are bound to stay in Germany (holidays only with special permission) and will attend to every interview the state job agency will get for you. You are allowed to refuse jobs that pay less than 90% of your older salary, but the longer you stay unemployed the less percentage you can claim. So yeah, you might even be fine with no emergency fund. – Mehdi Apr 16 '19 at 10:49
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    @Barmar You usually also get 2-3 months of work after being fired, so you have a lot of time to find another job; that's another 2-3 months of emergency fund you don't need, even better than the health benefits. USA is very different from pretty much all of Europe. – Luaan Apr 16 '19 at 11:59
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    @Mehdi The emergency fund is still a good thing to have while you're waiting for payments. You may still have gaps between when you'd usually expect money and when you get it from the social services. But a month's fund is usually quite enough to cover that, and you probably don't want less than that anyway for the usual "unexpected" expenses like having to pay a repairman or replace an appliance. – Luaan Apr 16 '19 at 12:02
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    @MarvMind and Leon Thanks for the clarification. I believe some online savings accounts are available to non-US residents, but of course the extra paperwork and exchange risk may not be worth it. – Cain Apr 16 '19 at 14:37
  • Unemployment money is either 60 or 67 per cent of last salary if you were employed for at least 12 month over the last 30 months, in Germany: 60 Prozent dieses Netto-Entgelts sind der Betrag, den Sie als Arbeitslosengeld pro Tag erhalten. Er erhöht sich auf 67 Prozent, falls Sie oder Ihr Ehe-/Lebenspartner ein Kind oder mehrere Kinder haben. https://www.arbeitsagentur.de/finanzielle-hilfen/arbeitslosengeld-anspruch-hoehe-dauer – Bernhard Döbler Jan 13 '21 at 17:12
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Here's the general order of things:

  1. Keep 3-6 months of expenses in a savings account for emergencies (lose your job, car accident, mauled by dingos, etc.)
  2. Pay down all your debt as fast as possible.
  3. Make sure you're contributing ~15% to your 401k, IRA, or similar personal retirement account.
  4. Invest everything else into a brokerage account for long-term goals or put it in savings for short- or medium-term goals (new car, house down payment, future tuition bills, etc.)

Check out Dave Ramsey's baby steps to financial freedom, which are very similar to the above. Just note that he's religious - I'm not religious at all but much of what he says is very good and doesn't require you to be his kind of religious.

GraphicsMuncher
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    #1 is country specific; for instance, European countries offer social security benefits upon loss of employment, so there's a lower need for emergency funds. – Leon Apr 15 '19 at 06:39
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    But even in european countries they do not replace your fridge or buy you a new car. As a german, I always kept 3 months reserve. It is also QUITE hard to get social benefits and claim a hardship with a lot of money tied up in investments. – TomTom Apr 15 '19 at 06:43
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    @TomTom You dont need 3-6 months of expenses to replace a fridge and for central European wage standards, 3 months of expenses buffer would suffice to buy you a reliable used car. About social benefits, I was referring more to unemployment benefits, might had the actual terminology mixed up there, my apologies. Point being made is such an emergency fund's size will vary wildly based on location. – Leon Apr 15 '19 at 06:46
  • @Leon the examples of a fridge or a car are at the trivia end of the scale. Consider the situation where you need emergency medical treatment, can't work for 6 months, have to spend most of that time in a care home recovering after hospital, and need substantial modifications to your home to allow you to continue living in it. European social security benefits will give you a "baseline standard" version of that sort of care, but if you want a good quality of life for a few decades afterwards, expect to pay for it yourself (say 1 or 2 years worth of average wages). – alephzero Apr 15 '19 at 08:02
  • @TomTom Unemployment insurance is not a social security benefit, it is a loss of income insurance. – gerrit Apr 15 '19 at 08:24
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    @Leon: while there are all kinds of social insurance in Germany, it may take time until they start paying. 3 month' expenses sounds reasonable to me: Unemployment insurance has a 3 month "embargo" period if the employee cancels the contract. They also have an "embargo" if in case the employer cancels (or fixed term ends) and employee doesn't show up at their office 3 months in advance. And if OP has investments, they cannot claim hardship to be processed faster. – cbeleites unhappy with SX Apr 15 '19 at 11:02
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    Point 3 is not so very relevant for Germany as the obligatory pension payments are automatically deducted (currently 18.6 % if employee's gross wage). The German equivalent to the personal retirement accounts @GraphicsMuncher mentions would be Riester-Rente, but that needs careful consideration whether it is better than "normal" investments. So maybe for Germany rewrite 3. as "check whether Riester is sensible for you" – cbeleites unhappy with SX Apr 15 '19 at 11:41
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    @cbeleites great, thanks for providing Germany specific advice to the topic. – Leon Apr 15 '19 at 12:12
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    Regardless of the social safety nets in place, I can't imagine a situation where you lose your job and NOT having 3-6 months of living expenses is less stressful than having it – Kevin Apr 15 '19 at 14:16
  • @alephzero I think keeping enough cash on hand to significantly remodel your house to accomodate a hypothetical major disability is probably overkill for most people's purposes. If you work around fast-moving machinery that is poorly-maintained and lacking in safety features, then sure, that's probaly worth factoring in; for most, however, a reserve of a few months salary equivalent is probably fine. – anaximander Apr 15 '19 at 14:35
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    @anaximander There are lots of ways to become disabled that have nothing to do with your work. E.g. high-speed car accident on the Autobahn. but in general, savings are for unforeseen issues including but not limited to losing ones job. Consider what happens if your furnace dies in the middle of January while you are out of work. Ideally you want enough to be able to at least handle more than one thing going wrong around the same time. – JimmyJames Apr 15 '19 at 19:21
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    @JimmyJames That's another thing that's different outside of the US - here in the UK, the average price of repairs to your central heating boiler is around a third of one month's salary (assuming a roughly average salary). In general, though, my point was that the probability of needing an emergency fund of several years' salary, as alephzero was suggesting, is very small indeed, and for most people (ie. those not at high risk of such emergencies) it's probably better to stick to just a few months' worth as a safety net and use the rest more profitably. – anaximander Apr 16 '19 at 08:25
  • @TomTom many many people bike to their job here in Germany, at least at my company, they represent 70% of the staff. – Mehdi Apr 16 '19 at 10:51
  • That is simply your company. This may be the case in either smallish companies, or in very limited scenarios, but if you work in a larger company, then many many people will come from quite far. I hardly know a company that does not have significant parking space - because people actually may live further out and public transportation may not cut it. Heck, even in Munich I preferred taking a car on many occasions to spending nearly the same time in public transport. – TomTom Apr 16 '19 at 11:04
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    @JimmyJames AFAIK the German state takes care of their disabled kind of like the Netherlands does. This means help with suitable housing, transportation (public and car modifications), re-education for fitting employment and of course the direct (medical) costs. Whether you got disabled at birth, at work or otherwise is afaik not that relevant. I know downplaying the merits of an emergency fund sounds irresponsible, but the point is that people already have a collective emergency fund, so their private emergency fund can be smaller (but not zero, imho) – Douwe Apr 16 '19 at 11:53
  • @Douwe So if you had a traumatic brain injury that made you unable to e.g. use a computer, the German government is going to retrain you for an unskilled job that pays the same as what you were making before? Do they cover all your expenses while you are in rehab? – JimmyJames Apr 17 '19 at 13:26
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    @JimmyJames No they will help you up and unto a certain limit, so they will retrain you if possible, but there are no guarantees you will make (even close to) your former salary. However, this is a moot point as no amount of emergency fund will ever be able to cover those losses, so we have (optional) insurance for that. As for expenses (at least in the Netherlands), they are covered, and the expenses your direct family makes are tax deductible. – Douwe Apr 17 '19 at 14:36
  • @Douwe It's not moot because it takes time to transition. Unless you are 100% sure that every reasonably likely scenario will work out for the OP based on government help, then recommending that they don't need much of a buffer in savings is pretty unethical, IMO. – JimmyJames Apr 17 '19 at 14:58
  • @JimmyJames "the point is that people already have a collective emergency fund, so their private emergency fund can be smaller (but not zero, imho)" is what I said. Having 6 months of salary eroding on a savings account with 0 interest and 1.7% inflation where 2 months would suffice is pretty bad financial advice, IMO. Emergency funds (here in northern Europe) are for cars and dishwashers breaking down, not for life altering doomsday scenario's. You simply cannot prepare for those unless you're very rich to start with, that's why we have collective insurance for those. – Douwe Apr 17 '19 at 15:34
  • @Douwe Oh, I get it. That's why what I wrote already addressed that. I find that conversations work best if they keep progressing. If one party keeps returning to the same point over an over again, all it suggests is that they can't address the latest points made by the other party. All of this 'in Northern Europe' stuff is pointless. You should have some number of months of core expenses covered by your buffer. 3 is good, 6 is better. What the government provides you is all part of that equation, just as it is in the US or anywhere else. – JimmyJames Apr 17 '19 at 16:36
  • @JimmyJames Please read https://www.investopedia.com/slide-show/top-5-reasons-why-people-go-bankrupt/ Then understand that reason 1 and 2 simply do not apply to Germans, 3 and 5 do not apply to OP, leaving 4: Unexpected expenses. You keep arguing that 1 and 2 do apply while they don't. That's why you get the same answer every time and that's why this "Northern Europe" stuff is not only relevant, but central to the issue we are discussing. This page is rife with people trying to explain why you have to take location into account, if you still don't understand progression is indeed lost. – Douwe Apr 18 '19 at 09:17
  • @Douwe "You keep arguing that 1 and 2 do apply while they don't" Please show me where I wrote that. – JimmyJames Apr 18 '19 at 13:34
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I never quite saw the difference between saving and investing - some investments are very safe but with lower return, savings accounts are just another safer-with-lower-return options.

So, assuming you're not tying your money up in something like a pension where you cannot get your money out until retirement age, you only need to consider the risk levels you're prepared to accept. (and your knowledge levels of investing, you see, I have this bridge for sale, great investment....)

If you just want to increase your risk slightly and gain a greater return, you can do that today. Remember to diversify (ie not put all your eggs in one basket) and beware the old "too good to be true" options and rampers on the internet telling you of the "next big thing". Start cautious and build up your knowledge, or move your savings into packaged funds of equity or bonds.

gbjbaanb
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    The BIG difference between "saving" and "investing" is a tiny thing called "liquidity". Savings are supposed to be investments that are highly liquid, they can be turned into cash on a short notice. They can (in a very not advisable case even BE cash, for instance under the matrass) "investing" investments are usually different degrees of liquid. A piece of land or an expensive painting or a rare bottle of wine can all be investments, but they are not very close to being cash. – Stian Apr 15 '19 at 11:35
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    @StianYttervik Most modern-day investments can be liquidated in minutes (eg stocks, and even wine is usually held as a share in a pooled account)(unless you're so rich all this is moot), whereas a lot of savings accounts are fixed-term for several years. So I'm not convinced of that definition. For too many people, savings often means "money I've got hanging around and not spent" – gbjbaanb Apr 15 '19 at 13:01
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    @gbjbaanb yes they can be liquidated in minutes, but the reason most people and especially institutions don't invest all their capital is because they don't want to run the risk of having to liquidate their investments at an unfavourable time (e.g in the depths of a recession) if they face financial hardship which cuts off their income stream. Its much more likely OP will lose his job in a recession, and if at that time all his savings are tied up in investments he will have to sell a proportion of his stocks / shares at a steely discounted price to pay for his fridge/car/etc – par Apr 15 '19 at 14:18
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    I consider investing to be a subset of saving. – Acccumulation Apr 15 '19 at 17:02
  • @par again, its about risk - in a recession you could have all your investment money in government bonds, and see them rise (as investors seek a safer haven than equities). So its still all about levels of risk. Risky: savings account < govt bonds < corp bonds < equities. But the reverse is also true: if you have mass inflation, your savings are going to be worth much less, compared to equities that will rise correspondingly. – gbjbaanb Apr 16 '19 at 10:20
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One rule of thumb is to keep 3-4 months of expenses in cash if you have a steady income, 6 or so months of expenses in cash if you do not have a steady income. (I am a contractor and use the latter rule.) One consideration here is people are bad at computing their expenses so it can be helpful to use a budgeting app to e.g. compute how much you should be saving each month for stuff you only buy once a year, to get a good sense for how much you should actually be budgeting each month.

Beyond that I would put money in the stock market.

(Assuming obviously you are not carrying any long term debt like credit cards or student loans; I would pay down those first before investing.)

Kevin Burke
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    "Beyond that I would put money in the stock market." This ignores potential targets set by OP, they may want to purchase a house in a few years or they may not be that far away from retiring. The stock market, in the long run, will undoubtedly lead to the best outcome but this assumes you can stomach variations in performance in the meanwhile and you won't need the money anytime soon. So you may want to include those points in your answer for completeness. – Leon Apr 15 '19 at 06:50
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    @Leon The stock market, in the long run, will undoubtedly lead to the best outcome — "undoubtedly" seems overstated here. Where money is at risk, there is, by definition, doubt (it's likely, but not undoubtedly) – gerrit Apr 15 '19 at 08:26
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    @gerrit over saving accounts and/or bonds, then yes equity(keep in mind I mean market-depth ETFs here and not single stocks) will undoubtedly lead to the best outcome, as far as passive investments are considered, over a sufficiently long time period unless the world melts down and a capital "C" crisis unlike anything is seen before hits us, in which cases we 'll have way grander troubles to solve than the outcome of our investment accounts. FWIW I already included a hint at protecting assets from instability short term when nearing retirement date in my answer for this purpose. – Leon Apr 15 '19 at 08:59
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Should I stop at all?

That's an interesting one. I suppose you'd want to ask yourself what investing really means to you first.

Money investment is quite an abstract notion; For some investment is putting capital at risk (sometimes very high) to gain profit (sometimes very) quickly, for some others is purchasing several properties in order to increase their monthly income through renting, for some others is just freezing money value over time by buying commodities that historically have been proven inflation-proof.

I'd suggest you follow your needs and mindset instead of just following the latest trends and tendencies you see around. And if you do so, make sure you have a very good understanding of the sector you place your hardly earned money.

Here's what I've chosen for me; Because I can by fussy about my capital, I have preferred not to risk any part of it; at all. What I do instead is to continuously save portions of my monthly income that I feel I have nothing else to do with it. I maintain different currency accounts with the strongest currencies worldwide and try to re-distribute my capital now and then depending on different factors each time. Occasionally, I also purchase bullion coins which are relatively easy to liquefy and which I consider a good option for easily accessible funds in a few decades from now.

As you can see from my example, I have chosen not to stop at all! I may be wrong on that but writing down that dilemma at the end of your long question (especially in bold) I get the feeling that playing safe is what you'd deeply be inclined to do but your environment makes you put that to question.

the.1337.house
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  • I think there might be a misunderstanding due to the choice of my words in the question. I'm not asking if I should stop doing something with my money. I'm curious if it is any more useful to put the % to the side every month instead of using this exact money to invest. – Suimon Apr 16 '19 at 10:33