According to the famous scientist, Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it”. It looks like the Finnish Parliament has finally understood this, which is good.
In March 2019, Finland’s Parliament made the final decision to approve the new laws that enable Finnish individuals to create their own individual stock savings account up to 50,000 Euros. Finns can open their account on 1.1.2020 and afterwards.
What are the benefits of the individual stock savings account?
There are some really favourable benefits for individual investors:
- The power of compound interest is much stronger, especially with time. Individual investors can sell their stocks (with capital gains) and also reinvest their dividends inside the account free of any tax. This is good for both long-time holders but also for stock traders and active investors. It basically accelerates the compounding effect when individuals don’t have to pay taxes that much. In the short term, it’s not much, but in the long term, it really matters a lot. If you don’t believe me, just look at the graph below.
- The maximum amount of money that can be transferred into individual stock savings account is 50,000 Euros. That is more than enough for most people. It can also be done in cycles (which might be a really good option). For example: if an individual transfers 10K into that account in 2020, and after five year the investments inside the account are worth 50K, he/she has still 40K left of money that he/she can transfer to the account. This kind of “cyclical” investment strategy can be really powerful when individuals invest for themselves or for their children. Time diversification is normal in investing and also recommended.
- Individuals can transfer up to 50K for their individual stock savings account, but there’s no limit of how much the investments can grow inside the account. The earlier in life an individual (or a parent) starts using this account, the more benefits it usually provides. It really matters how much taxes have to be paid for capital gains and dividends:
- Let’s take an example: if some parents are wealthy enough to have the money to invest 50,000 Euros when their child is 10 years old (one-time investment in this example), that 50,000 Euros would grow to be 503,132 Euros after 30 years when he/she would be 40 years old. The average stock market return has been somewhere between 7–10 % depending on how it is measured. I used an 8% annual return in this example. That 503,132 Euros would be worth of around 350,000 after taxes and considering the yearly inflation (2% in this example), that 350,000 would actually be worth of 193,000 Euros on the day when it was first invested (when the kid was 10 years old). Still not bad for an initial 50K investment.
- The individual stock savings account will probably attract more Finns into the world of investing which is really good as we have way too much money lying in our bank accounts that is only losing value because of inflation.
Who is this not for ?
The individual stock savings account is good for those who like buying single stocks and keeping them long-term. The account is not suitable for individuals who already have lots of stocks or big sums to invest, because the transfer limit is 50,000 Euros and previously purchased stocks cannot be transferred to the account. Also, it is not a good idea to use the account to buy stocks from other countries, because it’s not tax-efficient.
Most beginner investors start their investment journey by investing in ETFs (Exchange-Traded Funds), because these are good for diversification and usually cost-friendly. However, the new stock savings account is not applicable for ETFs, because it only allows individuals to buy single stocks.
Compared to other Nordic countries, Finns have been very careful with their money in the past when it comes to investing
We Finns are definitely too careful with our money. According to a Danske Bank’s survey, almost 80% of Finns think that investing in stocks is very risky. Only 50 % of Swedes think that way. From the graph below, we can see there is a huge difference when it comes to the ownership of stocks and mutual funds between Swedes and Finns.
In 2018, the average Swede had 133, 402 Euros invested while the average Finn only had 53,712 Euros invested. Finns have traditionally mainly bought their home and kept the rest of their money in their bank account, avoiding the stock market.
I hope that Finns will be encouraged to invest more and become wealthier with this individual stock savings account.
Joonas Saloranta covers Northern Europe investing, macroeconomics and more at the Financial Nordic blog.