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How to protect your savings against inflation in Germany

After years of very low inflation, price rises are back. How can you protect your savings in Germany against higher costs of living?

Bars of gold in storage in Berlin.
Bars of gold in storage in Berlin. Photo: dpa-tmn | Alexander Heinl

The rate of inflation in Germany currently lies at 4.3 percent, meaning that the average consumer good costs 4.3 percent more than it did a year ago. That is the highest rate of inflation in close to thirty years.

This is a pattern that is being seen across Europe and in many other parts of the world.

The European Central Bank (ECB) states that the current high inflation is a temporary effect of the pandemic. Lockdowns caused bottlenecks in global supply chains, leading to an imbalance in supply and demand. Meanwhile the German government cut the VAT rate last year, which temporarily lowered prices.

The ECB says that inflation will drop below 2 percent again by 2023.

Others are less sure, though. Deutsche Bank boss Christian Sewing said at the weekend that inflation wasn’t going away anytime soon.

“You have to think of it like a multi-story building, we’ve now reached a higher floor, and that’s where we’re going to stay for now,” Sewing told the Frankfurter Allgemeine newspaper.

It goes without saying that inflation is bad news for your bank account. Higher costs of living mean that the hard-earned cash you’ve been saving up will have less value in the future.

So, what can you do to make sure that your money doesn’t depreciate in value?

What not to do

The favoured solution among Germans for generations has been to store their cash in savings accounts or to buy government bonds.

These are both traditionally safe havens for your money that offer guaranteed returns.

At the end of last year, Germans held 2.8 trillion euros in savings in their bank accounts, making this by far the preferred method of keeping their money safe.

But there is a problem. From the Euro crisis of 2010 onwards, the ECB has pushed interest rates down to zero to ensure that poorer southern European states can keep servicing their debts.

This has had the knock-on effect that interest rates across the board have come down to zero or even gone into negative terrain.

Ask your bank what the interest is on a savings account at the moment and you will be offered something well below one percent. That’s much lower than the current inflation rate, meaning your money will be losing value in real terms.

The same goes for government bonds. Back at the turn of the millennium you could lend money to the German state with a five percent interest rate. But since 2019 interest has gone negative, meaning the money you lend to the state shrinks in size.

“At the moment German government bonds have no place in an investment portfolio which is designed to preserve or increase value,” Ulrich Kater, chief economist at Deka-Bank, recently told broadcaster ARD.

Most experts agree that the ECB is unlikely to raise interest rates any time soon, meaning that government bonds and savings accounts are unlikely to gain in attractiveness in the near future.

The old-fashioned option

One alternative option for investing your savings is buying gold. In times of financial uncertainty, the value of gold can rise.

A study by the Goethe University in Frankfurt concluded that gold historically offers the best value as an investment during times of inflation. Generally, investors tend to park their money in the precious metal due to the fact that it can’t be replicated, unlike money.

But investing in gold comes with ancillary costs such as storage.

Experts also warn that the price of gold is volatile. Last year it rose to a record high of over 2,000 dollars per ounce before dropping down to less than 1,800 dollars today.

“Gold is volatile – prices fluctuate over the long term in much the same way as those of stocks,” Andreas Hackethal, Professor of Finance at Goethe University Frankfurt, told the Süddeutsche Zeitung.

Investing in companies

Dabbling in the stock market is becoming an ever more attractive option for many German investors.

According to the German Stock Institute (DAI), some 12.4 million Germans owned stocks at the end of last year, marking a rise of 2.7 million over a twelve-month period. That also marks the highest level in almost 20 years. 

By the end of last year Germans had invested over €800 billion in stocks.

Currently popular are investments in Exchange Traded Funds (ETFs). These track the value of a group of stocks such as Germany’s blue chip DAX listing. They are popular among hobby investors due to the low ancillary costs and the fact that it is relatively easy to diversify investments and thus lower risk.

ETFs are popular among hobby investors. Photo: dpa-tmn | Zacharie Scheurer

In the past few years, these investments have proved to be good value. An ETF that tracks the DAX will have risen by 55 percent in the past five years. Stocks have generally bounced back strongly after the crash at the start of the pandemic in March 2020.

“In the long term, stocks remain an essential investment component, without which the preservation of one’s wealth will not succeed,” Chris-Oliver Schickentanz, head of investment strategy at Commerzbank, wrote recently to the Frankfurt bank’s customers.

At the same time though, people who invest in stocks need to be able to hold their nerve. Even an ETF can suffer a sharp downturn if there is a sudden correction in the stock markets.

Financial experts often recommend setting aside a set amount of one’s income that one invests each month into a stock portfolio. With this strategy one can lower the chances that one’s entire savings are hit by a sudden stock market crash.

Investing in property

While price inflation has only just hit consumer goods, it has been felt on the German property market for years.

A recent study suggested that Frankfurt has the biggest risk of a property bubble in the world thanks to a mixture of high demand and speculative buying.

In Frankfurt, real house prices – that means they are adjusted for inflation – have risen by 10 percent annually since 2016, the study by UBS bank found. 

With the price of properties now so high, financial experts are hesitant to recommend buying-to-let as a safe strategy for investing your money.

“Because real estate prices in many locations have risen so sharply in recent years, it is now almost impossible to achieve an acceptable return on a direct investment in a property through rental income,” asset manager DWS Group recently advised.

One alternative option is investing in property funds, which often buy up office spaces and industrial properties. 

Particularly popular among investors in Germany are open-end real estate funds. Investment in these means you receive a cut of the rental income from the fund while the value of your investment also benefits from the property market boom. 

According to ARD, well-managed funds can achieve annual returns of between four and five percent, i.e. slightly more than the rate of inflation.

SEE ALSO: Why everything is suddenly getting so expensive in Germany

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Where in Germany do people have the highest disposable income?

An economic study has shown huge regional differences in income throughout Germany. So which parts of the country have the most to spend each month, and which are feeling the squeeze?

Where in Germany do people have the highest disposable income?

A study by the Economic and Social Sciences Institute (WSI) of the Hans-Böckler foundation reveals stark regional differences in disposable income in Germany. In some cases, households had as much as double the spending money of those in other parts of the country. 

Here’s where people have the most – and least – disposable income each month.

What is disposable income?

The WSI calculated disposable income as the sum of income from wealth and employment, minus social contributions, income taxes, property taxes and other direct benefits or taxes.

What’s left is the income which private households can either spend on consumer goods or save.

The study, which was based on the most recent available national accounts data for 2019, looked at the disposable income of all of the 401 counties, districts and cities across Germany.

Which regions have the highest and lowest disposable incomes?

The study found that the regions with the highest disposable incomes were in the southern states.

Heilbronn in Baden-Württemberg had the highest disposable income of all 401 German counties and independent cities – with an average per capita disposable income of €42,275. The district of Starnberg in Bayern followed in second place with €38,509.

READ ALSO: REVEALED: How much do employees really earn across Germany’s states?

By comparison, per capita incomes in the cities of Gelsenkirchen and Duisburg in North Rhine-Westphalia were less than half as high, at €17,015 and €17,741 respectively. These regions had the lowest disposable income in the country. 

The study also found that, more than thirty years since German reunification, the eastern regions continue to lag behind those in the west in terms of wages.

According to the WSI, the Potsdam-Mittelmark district is the only district in the former east where the disposable per capita income of €24,127 exceeds the national average of €23,706.

Do regional price differences balance things out?

The study also showed that regionally different price levels contribute to a certain levelling out of disposable incomes, as regions with high incomes also tend to have higher rents and other living costs.

“People then have more money in their wallets, but they cannot afford more to the same extent,” WSI scientist Toralf Pusch explained.

READ ALSO: EXPLAINED: When will Germany raise the minimum wage?

Therefore, incomes in the eastern states, adjusted for purchasing power, are generally somewhat higher than the per capita amounts would suggest.

That could explain why, even after price adjustment, the cities of Gelsenkirchen and Duisburg in western Germany continue to be at the very bottom of the list.

Saxon-Anhalt’s Halle an der Saale, on the other hand, which has an average disposable income of only €18,527, benefits from the lower prices in the east.