The Dutch need to manage their money more wisely
22 Aug 2024
5 min
Written by Toon Peek, co-founder & CEO Equip
The financial outlook for Dutch people is concerning. A decline in real wages, an increasingly unattainable housing market, and lower pensions are making long-term financial security harder to achieve. These challenges mean that for the first time in a century, young adults are financially worse off than their parents.
On top of this, it turns out that many Dutch people do not manage their money wisely. Where are we missing financial opportunities, and how can we address this? That’s what I want to discuss in this piece.
People leave too much money in checking accounts
In times of higher inflation, it’s crucial to make your money work optimally. Yet, there is a staggering €116 billion sitting in checking accounts, earning no interest. With 8.4 million households in the Netherlands, my estimate is that only €40 billion is needed to cover daily expenses. This means that on average, €4,500 is sitting in a checking account. The rest would be better placed in savings accounts where it can earn interest.
Assuming an average savings interest rate of 2.5%, Dutch households together are missing out on €1.9 billion in interest per year. This amounts to €225 per household per year. This is money that can be easily earned with minimal effort and no risk.
People are not switching to higher savings rates
Currently, €481 billion is sitting in savings accounts held by individuals in the Netherlands. However, much of this money is with major banks that often do not pay the highest interest rates. Innovative savings account providers often offer at least 0.5% more interest. The Dutch Authority for the Financial Markets (AFM) recently concluded that people do not switch financial providers enough.
By not taking advantage of higher savings rates elsewhere, households are once again leaving a lot of money on the table. If all that savings could earn 0.5% more, that would mean an average of €285 more income per household per year.
People are not investing enough
Investing is one of the most effective ways to build wealth. Yet, 60% of Dutch people who could invest, do not. This means they are missing out on an average return of 9% per year, as has been achieved on the S&P 500 over the past 50 years. In comparison, the long-term average savings interest rate is around 2.0%. If you invest €10,000 instead of saving it, after 10 years, you would earn nearly €11,500 more in returns. In other words, more than €1,000 per year.
People are paying too much to invest
Rabobank recently reported an increase of €6 billion in new individual investments. Although more investment is undoubtedly a positive development, many people continue to invest with their home bank, which often charges higher fees than specialized investment platforms.
These investment platforms can keep costs lower through their innovative technology. Banks don’t have this technology by default and cannot easily develop it themselves. The acquisition of BUX, an innovative investment platform, by ABN AMRO in June 2023 illustrates this once again.
People are investing too riskily
Dutch households have €185 billion in investments, but only 62% of that is invested in diversified funds such as ETFs, according to data from the Dutch Central Bank (DNB). The rest is invested in individual stocks and bonds. If you don’t properly diversify individual stocks, it’s much riskier than investing in funds. Diversified investing has been proven to be the best way to generate stable returns. Without diversification, the value of your investments can fluctuate significantly, as recently happened with Adyen stock, which dropped nearly 40% in one day after disappointing results. This shows that many Dutch people may be taking unnecessary risks with their money.
People pay too little and too late attention to pension building
Research shows that about 50% of Dutch people will have less pension than they think. Many people start their pension planning too late, missing out on crucial years. It’s no surprise that today 42% of Dutch people worry whether they will have enough money in their old age. This is a quarter more than two years ago. Additionally, only 36% of the available tax room for pension building is being used, according to the AFM. Younger generations, in particular, are not taking advantage of this space, leading to significant missed tax benefits and less pension buildup.
Consequences of poor financial decisions
These missed opportunities have broad consequences, both personally and societally. Here are the three most important ones in my view:
Increased stress
Financial stress is a growing problem, especially among Millennials and Gen Z. No less than 45% cite finances as their biggest source of uncertainty. This leads to lower productivity and more absenteeism, which affects employers and the economy as a whole.
Growing inequality
People with more wealth receive better financial advice and can therefore grow their wealth more wisely and quickly. This widens the gap between rich and poor, exacerbating social tensions and inequality.
Pressure on social security
Lack of financial planning leads to greater dependence on social provisions such as pensions and allowances. This increases the pressure on these systems and could lead to higher taxes or cuts in the future.
What we can do to improve this
Improve financial education
Financial education is lacking in the Netherlands, while it’s crucial for healthy financial management. More educational programs and awareness campaigns, both in schools and through employers, can help people make better financial decisions throughout all stages of life.
Make independent financial advice more accessible
Many people rely on advice from banks or acquaintances, which is not always objective. Independent advice, without sales pitches, provides a reliable basis for financial decisions. By making this kind of advice more widely available, for example through independent advisors or innovative platforms, people can make better financial choices.
Stimulate innovation in the financial sector
Innovation in the financial sector is crucial for more efficient and accessible products and services. By simplifying the process of switching between service providers and integrating financial data from different providers, consumers can get the best terms and make better-informed decisions. This not only lowers costs but also stimulates competition, leading to better products and services.
Conclusion
The financial challenges the Dutch are facing today require a new approach. We cannot afford to miss opportunities by keeping money in the wrong places, investing too riskily, or delaying pension building. By investing in financial education, making independent advice more accessible, and stimulating innovation in the financial sector, we can not only improve personal financial situations but also contribute to a better economy and thus a stronger society. It’s time to take action and manage our money more wisely so that we can all benefit from a more secure financial future.