Saving money is good, but when it comes to growing it, keeping it in a savings account, or under your pillow will not make it grow. There is a cost to not investing, which can significantly impact your financial future. I learned this the hard way through my journey in the world of investing.

My Investment Journey

I started with stock trading, hoping to make quick gains. However, I quickly realized that it wasn’t for me. I lost more than I gained, and the time commitment was overwhelming.

Trading stocks required constant attention and quick decision-making, which didn’t suit my lifestyle or temperament.

I needed a more passive approach to investing, one that would allow me to grow my savings without the stress of daily market fluctuations.

That’s when I discovered the Plan Epargne Action (PEA), a French investment account designed to encourage individuals to invest in European stocks with attractive tax benefits. For someone like me who prefers a more hands-off investment strategy, the PEA was a perfect fit.

What is Plan Epargne Action (PEA)?

The Plan Epargne Action is a type of investment account in France that allows residents to invest in European stocks, including funds and ETFs, while enjoying significant tax advantages. The PEA is divided into two main types:

1-Classic PEA
This account allows investments in stocks and shares of companies within the European Union. The main advantage is the tax exemption on capital gains and dividends after five years, provided you don’t make any withdrawals during this period.

2-PEA-PME
This is aimed at investing in small and medium-sized enterprises (SMEs) in Europe. It follows the same tax rules as the classic PEA but focuses on supporting smaller businesses.

Why PEA is a Better Choice for Me

Given my previous experience with stock trading, I was looking for a way to invest passively. The PEA offered a solution that aligned with my goals and risk tolerance. Here’s how I leveraged the PEA to grow my investments:

1-Regular Monthly Savings
I started by setting up a regular monthly savings plan that automatically contributed to my PEA account. This disciplined approach ensured that I was consistently investing over time.

2-Investing in S&P 500 ETFs
Instead of picking individual stocks, which can be risky and time-consuming, I chose to invest in an S&P 500 ETF. This allowed me to benefit from the average market performance, which historically returns about 10% per year.

3-Tax Advantages
One of the biggest benefits of the PEA is the tax advantage. After five years, the capital gains and dividends are tax-exempt, provided no withdrawals are made during this period. This significantly boosts the net returns on my investments.

Reaching Financial Milestones

One of our financial goals was to reach our first €100,000 in combined household investments. This milestone is often considered one of the toughest to achieve. However, we managed to reach this goal through disciplined saving and smart investing.

The next target is to maximize each PEA account to €150,000, which means a combined investment of €300,000 for my partner and me. With the growth and dividends from these investments, we aim to have enough to comfortably live off during our retirement years. Any additional pension we receive will be a bonus.

The Importance of Self-Reliance in Retirement

Preparing for your own retirement is crucial. Relying solely on social aid from the government may not be sufficient to maintain your desired standard of living. By taking control of your financial future through smart investments like the PEA, you can ensure a more secure and comfortable retirement.

However, it’s important to note that not everyone can or should invest immediately. Before moving forward with investments, make sure you have:

1-Paid off all your debts (except your home)
Except your home if you are paying the mortgage monthly, prioritize paying off all debts such as credit card balances, car loans and other consumer debt as they can quickly erode your savings.

2-Emergency Fund
Ensure you have an emergency fund that covers 3-6 months of living expenses. This provides a financial cushion in case of unexpected expenses or income loss.

3-Investment Plan
Aim to invest at least 15% of your household income. This disciplined approach will help you build a substantial retirement fund over time.

Frequently Asked Questions (FAQs) About Plan Epargne Action

1. What happens if I withdraw my funds before the five-year period?

If you withdraw funds from your PEA before the five-year mark, you will lose the tax benefits associated with the account. The account will be closed, and any gains made will be subject to regular income tax and social security contributions.

2. How much should I save in a year for my PEA?

The amount you should save depends on your financial goals and current situation. A general recommendation is to save and invest at least 15% of your household income annually. This disciplined approach can help you build a significant retirement fund over time.

3. Can I transfer my existing investments into a PEA?

Generally, you cannot transfer existing investments directly into a PEA. You would need to liquidate those investments and then deposit the funds into your PEA to purchase eligible securities.

4. What are the investment options within a PEA?

Within a PEA, you can invest in a variety of securities, including stocks, ETFs, and mutual funds that are based in the European Union. This includes popular options like the S&P 500 ETFs, which provide broad market exposure.

5. Are there any fees associated with a PEA?

Yes, there are typically management fees and transaction fees associated with a PEA. These fees vary depending on the provider. It’s important to review these fees and consider their impact on your overall returns.

6. How is the PEA different from other investment accounts?

The main difference is the tax advantage. After holding investments in a PEA for five years, the capital gains and dividends become tax-exempt, provided no withdrawals are made. This makes it a highly attractive option for long-term investors.

Conclusion

The Plan Epargne Action (PEA) offers a powerful tool for growing your savings and preparing for a secure retirement. By understanding its benefits and leveraging its tax advantages, you can build a robust investment portfolio that grows over time.

If you’re considering the PEA, start by setting up a regular savings plan, investing in diversified options like ETFs, and taking advantage of the tax benefits. Remember to prioritize paying off high-interest debts and building an emergency fund before you begin investing.

Preparing for your own retirement through smart investments like the PEA is one of the best decisions you can make. It ensures that you have control over your financial future and can enjoy a comfortable retirement without solely relying on social aid.

If you have any questions, need help setting up your PEA,  or for more information and resources on mastering your finances and achieving your retirement goals, feel free to get in touch with us.

Here’s to your financial freedom!

Jun Pasion
MS365 Administrator | Cybersecurity | Managing my own finances