Supporters of a liberal economic order always argue for a state that is as lean as possible with low tax rates, because the sovereign citizen is better able to manage his money. This makes perfect sense to me, too. But in Germany, the situation is still not quite so clear-cut. Is the treasury perhaps even doing us a big favor by collectively managing a good portion of our paychecks?
All in all, the idea doesn't seem so far-fetched when you look at the figures, but ultimately it depends on each and every one of us, including you and how you handle your money.
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What citizens are doing wrong
I see two large groups in Germany that are unwise with their money. The first includes those who completely forgo saving and instead constantly try to live on the maximum large foot. Then the house is financed with a large mortgage, the fancy car with a car loan and the huge home theater system by consumer credit.
In order to be able to keep up when going out, the credit card and the overdraft facility are also charged to the limit. Owning on credit may make you happy in the short term, but in the long term it's hard to get ahead because you're always busy paying the installments.
The second group comprises the well-behaved savers. They transfer a portion of their income month after month to a time deposit account, money market fund, or something similar. Unfortunately, inflation-adjusted, there is usually no return at all in this way, and for a long time it has even been negative.
According to current calculations by the DZ Bank, about 1.500 billion just sitting around, not working for their owners and bringing the magic compound interest effect to fruition. The supposed security of savings is bought so dearly.
What the state is doing better
Now, yes, the state is regularly criticized, especially by business associations, but also by liberal-minded professors and citizens, for being so bloated and fleecing the working population. With a state quota of just over 44%, Germany is in the upper midfield internationally among industrialized nations.
The fact that countries like the U.S. and the U.K. are now starting a tax competition is adding to the pressure to reduce the tax burden. There could be something to it. But when you see what a large proportion of Germans do with their money, it makes you wonder whether, despite the bureaucracy, it might be a good thing that the state takes it, since it earns around 4% on their savings after all.
Let me explain: The federal government repays expensive debt and refinances many times cheaper. In the last quarter, the German Finance Agency made 31 billion. Euro of medium- to long-term bonds issued. For the majority of it hardly any interest is paid (just like on the accounts of the well-behaved savers). For example, for a 10-year federal bond expiring these days, we had to deal with an annual coupon of 4%. Some old long runners still pay much more.
As more is repaid than newly borrowed, debt service falls at an accelerated rate. From almost 70 billion. euros a few years ago, the interest expenditure of public budgets fell to 38 billion. Euro p. a. That's a good thing, because interest that I no longer have to pay is ultimately just as good as interest that I am credited with.
Why it depends on you
But you and I, we can do even better and then also with full right to claim a lower tax burden. Those with high-interest loans should first focus on repaying or rescheduling them as quickly as possible. For all others, it is important to adopt a wise investment strategy. There is nothing wrong with keeping a certain amount liquid in a bank account. But only if the larger part of the savings gives a return, you can eventually get to the nice point that your capital income becomes larger than your labor income.
You don't have to get into risky bets to do that. Right now there are enough fairly valued and robust companies that often also pay good dividends. On the stock exchanges, there is a suitable investment style for every type of investor, in terms of selection of companies and securities. Whatever you choose, the rule is that those who stay committed for the long term regularly earn good returns.
You have to keep reminding yourself: If you put 500 euros a month aside over the next 20 years, you will end up with about 140 thousand if the money earns an average interest rate of 1%, 190 thousand at 4%, but an astonishing 300 thousand at 8%, which is typical for index investors.
It gets much better: really successful stockpickers, who manage 16% on average, will then already have over 800 thousand, so the million is only two more years away.
So after just two decades, the particularly smart equity investor could have no less than five times as much on the high side as the eager saver – and that simply by very carefully selecting companies, without any elaborate trading or other tricks.
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