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24 questions
Why is paying off an overdraft often better than investing?
Because the interest you save is certain and tax free, while an investment only promises an uncertain return.
Why do you need an emergency fund before investing?
So an unexpected expense doesn't force you to sell your investments at a bad time.
What usually matters more over many years, your savings rate or your choice of securities?
Almost always the savings rate.
Is your emergency fund based on your income or your expenses?
On your expenses. What counts is how long you can live without new income.
Why isn't a stock ETF a good emergency fund?
Because you don't know what it will be worth when you need the money, and emergencies often coincide with bad times in the market.
What does the emergency fund cost you?
The return you miss out on. In exchange you never have to sell at the wrong moment.
Why can't you simply compare the return of paying off debt with an investment return?
Because it's certain and tax free, while an investment return is uncertain and taxable.
How much would an investment in Germany need to earn before tax to beat a loan at 8 percent?
At about 26 percent tax, roughly 10.9 percent, and with certainty.
Highest interest first or smallest debt first?
Highest interest saves more, smallest first is kept up more often. The difference is usually small.
Which number in your savings plan can you influence for certain?
The savings rate. The return you can only estimate.
Why do so many people miscalculate their spending?
Because items that only come once a year, such as insurance, holidays or repairs, are missing from monthly thinking.
Why does a standing order right after payday help?
Because what's in the account gets spent. What goes out first isn't there to spend.
Why does insurance make sense even though it costs money on average?
Because it prevents damage you couldn't recover from. With such risks, that matters more than the average.
Which losses should you usually not insure?
Ones you could pay from your emergency fund.
What speaks against products that combine insurance and investing?
Both parts become hard to compare and switch, and the costs are hard to see through.
Why does the risk of a loss fall the longer you invest?
Because the expected return grows steadily over time, while the swings only grow with the square root of time.
Are stocks safe after ten years?
No. There have been decades with losses after inflation. A long time frame only lowers the risk of having to sell in a slump.
What determines your equity share?
The sum of your long term goals, not a general recommendation.
What's the difference between risk capacity and risk tolerance?
Capacity depends on income, assets and time. Tolerance is what your nerves can take. The lower value applies.
Why is a risk test during good market times unreliable?
Because the answer depends heavily on what has happened in the market lately.
What declines should you expect in broad stock markets?
In the past there were several declines of 40 to 55 percent that took years to recover.
Roughly what does a year of waiting cost, and what can it bring?
It costs one year's expected return. If you pay off expensive debt meanwhile, you save for certain and usually more.
Why is quitting early so damaging?
Because a real loss right at the start puts many people off for good, so they never get back in.
Why is investing on credit especially dangerous?
Because repayment is tied to a market value you don't control. That leads to forced sales.