Can anyone give me an idea about investment scenario in Germany and the services I might need to be better equiped to invest?

Question

I am 24 years old and have recently started working as a software developer in Germany. At the moment I have not commitments for family or kids and I believe this is the right moment for me to actually start saving up and equipping my financial future. I am very interested in Trading and Real Estate, but I believe real estate requires capital. So at the moment I want to make investments .

Since I am an expat, I am not sure about the German laws that concerns investments and taxation. Normal taxation itself is a nightmare, so I would like to ask whether anyone can help me point out the services I might be better off paying for that can help my investment plan. Something like Financial advisor or so.

After careful research I came across Vanguard s&P 500 index fund, how effective is it in Germany and whether there any specific things to know before going with it. Also I am thinking about using eToro as the broker, I see they do not charge any provision but one has to pay 5 dollar flat on any payouts. Are there any hidden charges for eToro and can anyone help me with their experience with eToror.

I am also confused about taxation. So am I also taxed on the profits I made which are not cashed out or am I just taxed for the income that is cashed out ? Incase if I reinvest the profits entirely, do I still need to pay tax ? Thank you very much in advance.

Answer 1

Since you are asking a lot of questions at once, this answer is a non-exhaustive list of options to consider:

• Setup an emergency fund first. A usual recommendation runs at 3-9 x your monthly salary. Due to the german social safety net, this multipler can be lower, but as you are a foreign national(?), you might rather err on the higher side.
• Deal with any possible outstanding debt. If your interest is in the low-single digits, you might consider investing before paying it off. I would still advise paying it off first.
• Real-Estate: It usually does require significant capital or debt-leverage. As it is also highly location dependent (e.g. Munich and provincial Mecklenburg-Vorpommern rents, prices, and expected profits will show vast differences, there could be "Denkmalschutz" on your appartment, etc.), check your potential local market first. Also consider that real estate as your primary residence is very different from an investment in real estate to rent out. An alternative might be investing in real-estate through REITs (Real Estate Investment Trusts), where you can invest with less initial capital and have more diversification than an individual object. However, last I've checked, taxation of REITs in Germany seems tricky and the returns are not necessarily comparable with US alternatives. Plus as with all real-estate, there are a lot of unknowns regarding future profit, e.g. the Mietbremse established in Berlin.
• Stocks: A Vanguard S&P 500 invests in the American stock market. While a lot of the big companies in the S&P 500 have implicit international exposure as world players, your main geographical focus will still be in the US. An alternative would be e.g. an EuroStoxx50 or an AllCountryAllWorld fund (e.g. tracking MSCI or FT indices). Also in case you plan to invest in a fund denominated in USD, you might expose yourself to currency risk. Generally however, I'd recommend a diversified ETF with low fees.
• Broker: I have no personal experience with eToro. You can, however, find lots of comparisons between different brokers and their pricing structure with a short google search.
• Taxation: You are taxed on the profits you make, i.e. the "Abgeltungssteuer" for stocks. This also includes paid out dividends or automatically reinvested dividends of stocks) ("ausschüttend" or "thesaurierend"), which are usually automatically deducted by the bank if you set a correct "Freistellungauftrag". This also sets the first 801€ of your combined profit across all your investments as taxfree. Also you may pay church-tax on it, in case you did not opt-out. Real estate taxation depends on use (e.g. is it your primary residence or are you renting it out). Depending on use as a primary residence, you may also get various tax breaks or incentives.
• Financial advisors: You can go to any bank to get financial advice on investments. As their incentive is to make money for themselves first, and you second, they may however try to sell you on options with high fees that lock you in for a long time. Some of those options may still be worth it depending on the context and specifics. A "Riester", Lebensversicherung or Bausparvertrag may be worth it in specific cases. However, as you are single, 24 and work in software, I doubt it. There are also various independent financial consultants. Many will likely also try to sell you onto specific products they are affiliated with. It's best to come into these conversations with a baseline of financial knowledge, so read some books first and educate yourself on what makes sense for you.