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Prerequisites

Before you open any account, there are a few things you need to check to assess your readiness:

info

The information on this page is for educational purposes only and should not be considered as financial or investment advice. The content reflects general principles and guidelines, which may not be suitable for every individual's financial situation. Readers are strongly encouraged to conduct their own research, and the author assumes no responsibility for actions taken based on the information provided.

Time horizon

There are 3 important questions that should be answered, and that require you to have a clear idea of the time horizon for your investment:

  • Is the stock market the right place for you to invest in?
  • Which types of accounts you should open?
  • What level of risk can you take?

The suggestions below are not an absolute truth and are highly dependent on your current personal and financial situation, on the current stock market trends etc. The maximum risk with stocks is the total loss of the invested amount. Even though a total loss is uncommon, the stock market going down >30% is not rare: it happened in 2022, 2020, 2008, 2000, 1987, 1973 etc.

Your horizon is:

  • Under 3 years: stay out of the stock market.
  • 3 to 5 years: if the stock market has not been going up dramatically, if the economies are doing well, if you can handle high volatility and accept the idea of potentially booking a loss, then you can consider allocating some cash to stocks. The best account to do so would be through a CTO.
  • 5 years or more: you can invest through a CTO or a PEA for tax benefits.
  • 8 years or more: you can also consider the life insurance contract as a way to invest money with tax benefits.
  • As long as you can imagine (e.g. retirement): the further you are from your "deadline", the more aggressive and risk-taking you can afford to be. You can invest through a CTO for the freedom of cashing out anytime, a PEA if you can accept being locked for 5 years in exchange of tax-benefits, or a PER if you are ok with being locked until retirement (or exceptional circumstances).
Time HorizonLivretCTOPEALife InsurancePER
Immediate🟡
Less than 5 years🟡🟡
More than 5 years🟡
More than 8 years
Until retirement / purchase of your primary residence

Meaning: unlocking the money is ✅ Possible 🟡 Possible but not recommended ❌ Impossible (except exceptional circumstances)

You will learn more about different types of accounts on the next page.

Cash savings

Keeping a reasonable amount of cash outside of the stock market is crucial. A simple rule-of-thumb says to keep 6-month of living expenses in cash. If you need 1500€ per month to cover your rent, utilities, insurances, subscriptions, car, gas, food etc., then you should always keep around 8k€ to 10k€ in cash. This amount can vary depending on the riskiness of your current situation.

Why such buffer? You would not want to be forced to sell your stocks in a market downturn.

Example: You have 30k€ of cash, but you don't know yet that the stock market will crash 50% and that you will need to buy a 10k€ second-hand car at the same time.

  • Scenario 1: you decide to go all-in into stocks. You have to sell stocks to cover the car expense. You end up with 5k€ left into stocks.
  • Scenario 2: you put half of the money into stocks. You manage to cover the expense using your cash only. In the end, you still have 5k€ in cash, and 7.5k€ invested into stocks.

Later, the market recovers entirely, which means it goes up 100%:

  • Scenario 1: your stocks are now worth 10k€.
  • Scenario 2: your cash is still worth 5k€ but now your stocks are back to 15k€.

Conclusion: by avoiding a forced sale of stocks, you can stay invested in the stock market and enjoy the full strength of its recovery.

tip

To know where to keep your cash, check information related to Livret A, LDDS and LEP.

Taxable income and TMI

Knowing your taxable income will determine if you need to open certain types of account or not, in order to optimize your taxes.

  1. If you work for a french company, it is written on every payslip.

    • Find your latest december payslip and check the table with the annual (annuel) number for "net imposable".
    • If your salary is the same every single month, get your latest payslip and multiply by 12 the monthly (mensuel) amount of "net imposable".
  2. If you already filed for taxes in France, that number can be found on your "avis d'impôt".

    To download it:

    • Go to https://www.impots.gouv.fr/
    • Log in, click on "Documents" then click the year N-1.
    • Your document should be named "Avis d'impôt 2023 sur les revenus et prélèvements sociaux 2022".
    • On the second page, under "Détails des revenus", the line "Salaires" shows your total salary "net imposable" (= taxable).

Once you have that holy grail, the second step is to know in which tax bracket you fall into. By default, there is a 10% deduction applied on your taxable income so you will be taxed on 90% of it.

For example: if your taxable income is 40 000€, you will be taxed on 40 000 x 90% = 36 000€

Then you can use the table below to know your tax bracket.

Tax brackets

Tax brackets for income earned in 2023

How to use this table? Let's get back to our example of 40 000€ of taxable income, with 36 000€ effectively taxed after the 10% deduction.

  • Income between 0 and 11 294€ will be taxed at 0% -> 11 294€ in this bracket
  • Income between 11 295€ and 28 797€ will be taxed at 11% -> 17 503€ in this bracket
  • Income between 28 798€ and 82 341€ will be taxed at 30% -> 7 203€ in this bracket

The final income tax will be: 4 086€

  • 11 294 x 0% = 0€ for the 0% bracket
  • 17 503 x 11% = 1 925€ for the 11% bracket
  • 7 203 x 30% = 2 161€ for the 30% bracket

The most important information here is that the highest tax bracket "used" is the 30% one, with 7 203€ of income in this bracket. We say in france that your TMI (Taux Marginal d'Imposition = marginal tax rate) is 30%.

Wrap-up

Congratulations for making it this far! By now you should know:

  • if your time horizon is suitable to invest in the stock market.
  • which types of accounts you can consider opening.
  • if you have enough cash on the side.
  • your TMI (marginal tax rate).