Hiya, this is a post especially for graduates. I’m writing a series Personal Finance 1.0 on personal finance topics that you should know when starting life on your own. If you’re an older reader: Maybe you know someone who could benefit from this information. So please feel free to share this post.
Ok, let’s go!
This is the second post regarding the bank accounts you need when you’ve started your first job. Have a look at the first part here.
The checking account which I wrote about in the first part is the only mandatory account. But you’re in the perfect great position to get your personal finances set up properly and understand building assets right from the start. The additional accounts I want to introduce in this posts are helpful tools to further this end.
Build up an emergency fund first
If you already checked out my post Build a Plan for Your Financial Independence, you’ll know that I recommend building up an emergency fund as quickly as possible. Generally, this should be between three and six times monthly expenses. I consider this a fund for real emergencies. That is for unplanned and not foreseeable expenses. It’s not a pot to dip into each time annual insurance premiums come due.
This reserve has to be liquid on short-term notice. So theoretically, you could keep it in your checking account. But I wouldn’t do that. Ideally, the money in your emergency fund earns some interest while it’s not used. Checking accounts usually pay out very low, if any interest at all.
Store your emergency fund separately
Current credit interest rates in Germany are so low that you’ll not make a lot of money using the alternatives either. But if only for psychological reasons. I would keep my emergency fund separate from my “normal” checking account. My account of choice for this would be a Tagesgeldkonto (money market account, call money account).
You could theoretically use a savings account as well – quite old school. But in case of an emergency you might not be able to cash-out the whole amount at once, there are usually limits like 2,000 Euro/month. That might become a problem if you have to deal with a larger emergency.
My choice: a Tagesgeldkonto with a direct bank
I’ve chosen a Tagesgeldkonto with one of the direct banks that I can access online. The whole balance is disposable on a daily basis for this type of account. In times of normal interest rates, Tagesgeldkonten are quite attractive interest-wise.
If you live outside of Germany or the Eurozone, just check out what comparable products are on offer. Interest rates for call-money might be a lot higher. The rates depend on the level of the central banks’ base interest rate, which figures at more than 2% in the US at this point, while it’s at 0% in the Eurozone.
Many banks offer Tagesgeldkonten. Among them are banks that you might not even be aware of, like the Renault- or the Volkswagenbank. If you google “Tagesgeld” comparisons you’ll see that what’s on offer is not restricted to suppliers from Germany.
Private or statutory deposit guarantees?
It’s important to make sure that the money in your call money account is as safe as possible. Within Germany there are two different types of deposit guarantees: On the one hand the German banks have their own deposit guarantee funds, going by organisational type, i.e. private banks, Sparkassen, etc.. They guarantee very high amounts per person per bank.
On the other hand there is a European deposit guarantee fund which guarantees up to 100,000 Euro per person per bank. Should guarantees come due pay-out will not be immediate, though. Insolvency of a bank is not a completely theoretical issue either. In the fall of 2008 many German investors were hit by the crash of the Kaupthing bank in Island which had touted for call money with attractive-looking interest rates till shortly before.
Banks will not always be bailed out
And we very luckily escaped the insolvency of the noa bank in the summer of 2010. The bank had positioned itself as very ethically correct and compatible with a young, urban demographic. You were able to choose in which type of loans your money would be invested. In the media, the noa bank was a success story at that point: a cool founder, “the better bank”, quite advanced in their use of online communications as well.
I became suspicious when an installment of our standing order wasn’t accepted – allegedly because of the bank’s overwhelming success. Apparently there really was a very large inflow of investment capital that couldn’t be matched with an adequate amount of demand for loans. Anyway, my gut feeling told me to get out quickly, and that’s what we did. On August 18, 2010, the bank was effectively closed down by the Bafin (German bank regulation).
The noa bank did not belong to one of the private guarantee funds. The statutory guarantee was available, but only covered 50,000 Euro per person at the time. So investors lost money in this bankruptcy as well.
Your emergency fund is not risk capital
I’m telling you this as I’ve come across a certain type of smartly marketed peer-to-peer investments being discussed as if they were a 1-to-1 alternative to a traditional Tagesgeldkonto in some blog and podcast comments. Sure, everybody would like to profit from the level of interest rates they offer. This can work out okay – but it might not.
So don’t put your emergency fund at risk. The equation “higher interest = higher risk” is still true. But so is the saying “greed swallows brain”, unfortunately.
What might be interesting as well – and that’s what we use – is a combination of Tagesgeldkonto and brokerage account. This means on top of our emergency fund, savings rates for buying ETFs, mutual funds or single stocks can be stored in the Tagesgeldkonto as well. And the Tagesgeldkonto also works as the reference account for the brokerage account.
I find that extremely comfortable. In the olden days we did some “Tagesgeld-Hopping” as well. Which meant opening new accounts with a higher interest rate or an interest incentive and moving money back and forth continuously. Given the current level of interest the potential gain is not worth the effort in my opinion.
You can open a separate brokerage account as well, of course. If you’ve already built up your emergency fund and would like to start an ETF savings-plan for example, you can go to justetf.com (no affiliate link) and check out which banks offer this type of plan, and who offers the best deal given the amount you want to invest each month.
There are a range of brokerage account comparisons on the internet regarding fees, range of investment products available and so on. You should get a basic understanding of the different options. But I wouldn’t dive too deep into this. Most direct banks have sensible fee structures.
Just get started
As a beginner, I would tend to start with one of them. You can always transfer to a more specialized broker later when you’re more experienced and might have different needs. Otherwise you might be hit with “paralysis by analysis” which I often comes across reading the questions investment beginners post in blog comments and forums.
Out of fear of not having found THE most advantageous broker yet, people don’t invest at all. But while you can philosophize on investing forever, it’s not a good idea to keep postponing the real thing. How will you react in reality when share prices drop, for example? If you spend too long on looking for the optimum solution – which probably doesn’t exist anyway – you might actually lose more in returns then what the differences in fees would have amounted to.
Keep it simple
So, don’t make things too complicated. I would look for an online brokerage account with a broad selection of ETFs and transparent and competitive fees. Meaning: no holding charges, no fees for crediting dividends, ideally less than 1% order fees on a volume of 1,000 Euros. If you want to open an ETF savings plan with a monthly savings rate of 100 Euro you’ll probably be closer to 1.5 – 1.75%. There are also banks that charge a fixed fee per savings installment. So you could lower the percentage if you invested 300 Euros per quarter rather than 100 Euros per month.
Traditional branch banks are not an alternative for me due to their fee structures.
Credit card accounts
I’d like to round off things with a few words regarding credit cards. Unfortunately you can’t integrate this “tool” into your personal finance strategy as brilliantly as you could in the US. They have such a vast offer of attractive sign-up bonuses and reward-systems that whole families can (almost) fund their entire travel and vacations just by paying their regular expenses with the cards.
Which is further helped by the fact that way more expenses can actually be settled by card than in Germany: electricity and gas for example, or even taxes. Some of the cards are also coupled with cash-backs. So you’ll end up with a win-win-win. Only if you pay the balance off at the end of the month, of course.
Credit card reward desert Germany
In Germany, you can collect airline reward points via credit cards as well, and there are some cash-back offers. But my impression is that you will often save more if you do a bit of research. In any case, a lot of checking accounts will give you a credit card by default.
If you don’t get one automatically but do want one, comparison shop and decide which card gives you the best value for money – there might be annual fees involved. Depending on your lifestyle, the debit cards issued by some of the fin techs might be of interest as well. This goes back to what I wrote about in the first part of this post.
So that’s it. You should have a good base understanding now to do your own research, have fun with it!
If you have further questions, just post them in the comments or get in touch with me directly.
Financial Independence Rocks!