Regular Savings Plan
How do I find the right Savings Plan?
Before you go into the detailed construction of a Regular Savings Plan, ask yourself:
• For which specific goal do I need to save? [study, retirement, children’s education, …?]
• How much time do I have?
• What is the target amount in that time?
• What might be a realistic monthly amount?
Prepare an income and expenditure account
An income and expenditure calculation is very important to establish your monthly liquidity. Create an overview of your fixed and variable income (net salary, bonus payments, rental income, interest and dividends, … ). Compare those with your expenses (rents, mortgages, loan repayments, insurance, existing savings contracts, living costs, hobbies and vacations, …). Don’t guess. Use bank statements and salary slips. The more realistic your calculation the more confidence you will a have in setting a monthly amount for total savings.
Examples of existing assets are current account funds, regular saving plans, securities, pension schemes, insurance and real estate. If, for instance, your savings are to go towards retirement or early retirement, then it is important to include existing assets and existing retirement provisions in your calculation.
What return could I aim for in the long term?
The possible average return for a regular savings plan that runs over an extended period (10, 15, or 25 years) is from 6-8% p.a. It is important to understand that this will fluctuate from year to year, especially for returns based on mutual funds, ETFs and stocks.
The effect of inflation
The average inflation rate over the last 30 years is close to 2.50% p.a., but what does this actually mean? In short, inflation is the devaluation of money. This means that you can buy more for EUR 2,500 today than you will be able to in 20 years time. If you can live with EUR 2,500 a month today, you may need EUR 4,120 in 20 years to have exactly the same lifestyle and purchasing power.
What do you need to consider when looking for the right Regular Savings Plan?
Our lives and the financial climate may change very quickly. It is therefore important to remain flexible when building wealth. Make sure that your Regular Savings Plan can be adapted to your current lifestyle. Include, for example, the following features:
– You should be able to change the savings rate
– You should be able to temporarily suspend the savings rate
– You should be able to switch investments at no additional cost
– You should have a wide range of investments available
Which investments should I couple with my Regular Savings Plan?
With long-term savings contracts (longer than 10 years) it makes sense to put your savings into a stock market. This can be done with mutual funds or ETFs to best maintain broad diversification. Diversification in global markets with attention to trends such as clean energy, hydrogen, digitalization, cyber security, and precious metals, makes sense, because in this way you can reduce fluctuations and risk.
What hidden costs are involved?
Some plans come with high variable costs and contracts may be complex. Always make sure that changes to your Regular Savings Plan are not subject to additional fees or penalties. Have the cost structure explained to you in detail and if in doubt, have your questions answered again in writing.
Can I cancel an existing Regular Savings Plan?
That can always be done but pay attention to the contract details. There can be financial disadvantages, especially with older contracts. Your provider may charge additional fees or withhold a part of your capital as penalties in such a case. Before you take steps to terminate an existing contract read the details and seek independent advice from experts.
Why consider a Regular Savings Plan?
There are many benefits.
- It can help to save assets sustainably and in the long term and achieve financial goals.
- By investing in stock markets you have the chance to achieve attractive returns in the long term and protect your assets from the loss of purchasing power due to inflation.
- Many regular savings plans offer bonus payments, e.g. for meeting certain targets or for saving regularly and consistently.
- As you do not withdraw money from a Regular Savings Plan during the agreed term, you benefit from compounding interest.
Regular Savings Plans offer the opportunity to build wealth for as little as 100EUR/USD per month. Here are two examples of what can be achieved with a Regular Savings Plan, taking account of inflation:
If you have questions about possible Regular Savings Plans and would like to explore possibilities with experts contact us and arrange a non-binding, free consultation in English or German.