10 cases when you should not leave your savings lie in the bank
Did you know that the ECB deposit rate is at its highest level since the euro was created? The current market environment offers a wealth of opportunities to capitalise on short-term savings with minimal risk. Unfortunately, attractive market yields will elude the 27 billion that Slovaks hold in current accounts. Does this statistic happen to apply to your money as well?
In which cases and why not to leave money lying in bank accounts:
- You are not receiving interest on your deposit account that is anywhere near current market interest rates
- Inflation - a silent money killer and a reason not to keep it in the bank
- You have a higher emergency fund because you are either careful or an entrepreneur
- You are planning to buy a real estate
- Payment of taxes
- You save for the annual holiday
- You are planning a wedding
- Large purchases, reconstruction, car procurement
- You want to start valuing savings carefully
- You don't like to waste
- You are conservative, but 0% does not strike your fancy
- You are waiting for a stock correction
- When to finally reach for Intelligent Investing portfolios?
- How do I open an Intelligent Wallet or Smart Deposit?
Do you want to be rich? Let me tell you a recipe for getting rich, it's no secret. To succeed in the financial field, all you have to do is spend less than you earn and invest this difference wisely and, above all, in the long term. Done, that's all.
For extra good results, I recommend avoiding speculation, spreading the risk, and also paying attention to fees and taxes. Then all you have to do is wait. Thanks to passive investment, you can achieve any realistic goal. In principle, however, the longer you let your money work, the higher return you get.
Don't let market interest rates pass you by
According to data from the National Bank of Slovakia, the Slovak population holds more than EUR 30 billion in deposit products with immediate maturity. These staggering sums lie in current and savings accounts, which do not earn market returns in most banks.
You can assess this for yourself. The ECB deposit rate is currently 4%. Banks are already lending each other excess reserves overnight at a similar rate. The yield on the German 2-year bond is above 3% (as of 11/13/2023, when we publish this version of the blog). Investors are already lending funds to the German government for two years at this yield.
How much interest are you earning on your checking or savings account? Is it at least half of the interest mentioned above? If not, we encourage you to read this blog till the end.
Finax has designed two conservative products that aim to give savers access to current elevated market interest rates with minimal risk of fluctuations in the value of the investment. The first is the Smart Deposit, designed to save for up to one year. The second is the Intelligent Wallet, reserved for funds you will need in 1 to 3 years.
Let's look at some real-life examples of their potential uses.
1. Higher emergency fund for cautious people (and entrepreneurs)
The emergency fund is the cornerstone of personal finance. We have written and said a lot about its importance in recent years. But I want to bring your special attention to the blog of the founder of Finax Juraj Hrbatý: Emergency fund - the first and basic goal of the investor.
The ideal emergency fund should be able to cover the loss of income for 3 to 6 months, and given the low probability of its use, it is best to invest the majority of it. But personal finance is not an exact science, and you would search in vain for universal solutions.
For example, if you work in a sector with a higher risk of job loss (tourism, gastronomy, etc.), it may be prudent to try to build an even higher emergency fund, ideally in the range of 6 to 12 monthly expenses. At the same time, with the increasing probability of drawing most of the financial reserve early, the risk that you should take with it decreases.
However, it is still true that a situation that would cause a drop in income or unexpected expenses may not eventually occur at all. Therefore, it would be a pity for your emergency fund to lose value in the bank's transaction account every day. Today, this unfortunately also applies to savings accounts and term deposits, the yield of which lags far behind inflation as well.
The Wallet is also suitable for entrepreneurs whose income is highly variable. If your income fluctuates from month to month (for instance due to seasonality or having a smaller number of large orders at some points of the year), you can replenish missing resources in poorer months from your Intelligent Wallet.
2. Purchase of real estate
Have you booked a new building "from the paper" and are you waiting to pay off the remaining part of the purchase price from your own resources within the next 2 to 3 years?
In that case, I recommend you to read the Future Purchase Agreement with the developer carefully again. It probably contains the so-called inflation clause, thanks to which the developer can increase the final price in the event of a significant increase in construction costs.
This is precisely the situation that many builders are struggling with today. The prices of many materials have risen by tens of percent since the beginning of the year, and not every developer has been able to contract a sufficient amount of material for the entire construction in advance for pre-crisis prices.
Even in this case, you must not rest on your laurels and you should try to keep pace with inflation. Then you won't have to worry about an unpleasant surprise in the form of a higher bill. And what if the price doesn’t rise in the end? It doesn’t matter; you can use the yield to furnish the apartment after its approval and takeover.
In the example above, we can see a possible appreciation of a one-time investment of 80,000 deposited in the Wallet for the period of 3 years. The average expected result of 86,152 euros after 3 years of investing with minimal risk is already worth considering, what do you think?
Even in a pessimistic scenario (with a 90% probability, you would historically achieve at least that result), you would end up losing less than 800 euros. So, on average, you risk a 1% decline in value to get a net return of nearly 8% (average expected result) to 15% (optimistic result).
Even if you have not found your prospective property yet, you do not have to leave the prepared 10-20% of the purchase price in a bank account with zero appreciation. If you are planning to buy an asset (real estate), whose value usually grows over time by at least the rate of inflation, it is good to at least keep up with the rise in its price. Otherwise, the vision of your own housing will become more and more distant from year to year.
If you run your own business, you are probably very well aware of the unfortunate fact that in March (or in June, if you took the option to file a tax return 3 months later) you regularly have to pay a large item - income tax and, in case of a profit payout, a dividend tax as well. It is best to prepare for such larger expected expenses on an ongoing basis.
It is a good practice to set aside at least 15-20% (depending on the type of company and total revenues and expenses) from each invoice paid for taxes. For many entrepreneurs, it can be thousands of euros a month. Wouldn't it be a shame not to value this money by at least a few percent?
For many families, a summer holiday by the sea is the biggest one-time expense of the year. Anyone who travels with 2 small children probably already knows that a 2-week stay by the sea counts in thousands. Even in this case, the Intelligent Wallet is a better alternative to a savings account in a bank.
If you do not book and pay for your holiday well in advance and rather rely on last-minute reservations, you may also be affected by a rise in accommodation prices and transport costs. The yield on the Intelligent Wallet can at least to some extent compensate for this increase.
Are you planning a wedding in the near future, and you don’t want to have just a ceremony at the registry office without guests? Then prepare about 8 to 16 thousand euros. On average, that’s how much young people spend on a traditional wedding with 60 to 100 guests.
Since expenses on food, drink, clothing and flower arrangements constitute a large part of the costs, your budget will be extra sensitive to any rise in the price level (inflation). If you don't want to rely solely on gifts from family and guests, create a financial plan as soon as possible and start saving. Thanks to the Intelligent Wallet, you will save 10 thousand euros with an investment of 268 euros per month for 3 years.
6. Other large purchases and deferred consumption
There are countless reasons to save. For some, the goal may be to buy a new (or rather used) car, for others to buy expensive electronics or a large home reconstruction. Whatever goal you have, if it is more than a few months away, you can also use our Wallet for savings.
Similarly, you can deposit part of extraordinarily high rewards, money from the sale of real estate, or acquired inheritance in the Wallet. Simply funds, about the use of which you do not have a clear idea yet, and which you will need in the horizon of 1 to 3 years.
7. Auxiliary wheels
If you do not have experience with investing yet and you have not gained enough confidence in the functioning of financial markets, the Intelligent Wallet is a good start for you. A parallel with winter swimming can be applied.
For newcomers, it makes more sense to start gradually exposing themselves to an increasingly greater cold (in our case, the risk expressed by the share of stocks in the portfolio), so that in the end you can easily handle almost any cold water (stock market fluctuations).
Such an approach is certainly more suitable for most people than shock therapy. An inexperienced daredevil's jump into ice water can very quickly end in panic and an unpleasant experience. Something similar has certainly been experienced by many novice investors at the beginning of last year when stock markets recorded the fastest decline ever from historical highs.
The share of the equity component in the Intelligent Wallet is only 10%, while the predominant part consists of safe global government bonds (40%), inflation-indexed bonds (10%), cash (38%), and gold (2%). In our opinion (and according to extensive testing), such a mix of assets represents an ideal combination in terms of potential return and minimal risk.
8. If you don’t like to waste
Do you turn off the light when you leave the room? Do you dislike leaving the water running longer than is really necessary? Do you compare prices in several e-shops before buying? Do you conscientiously meet the conditions of the bank to get a free account? If you answered yes to these questions (or you’re at least nodding your head in agreement), you probably despise wasting.
The problem with inflation is that its impact on savings is not visible for a long time. If you have 18,250 euros in your bank savings account today and you look at the account again in 2 or 5 years, you will probably still have 18,250 euros there. However, the purchasing power of this money will of course be significantly lower due to inflation.
With annual inflation at the level of 2%, the loss of purchasing power is 356 euros (2% of 18,250 euros). That is exactly 1 euro a day. Yes, it is not a dizzying amount, but somehow, I do not like the idea of throwing 1 euro a day out of the window. With inflation above 2%, of course, this problem gets even greater.
9. If you are conservative, but don't want 0%
Naturally, each of us find themselves in a different financial situation, we also have different goals and tolerance of risk (volatility, ie fluctuations in the value of the investment). Fortunately, when investing, we do not have to decide solely between leaving money in the bank in an account with zero nominal return and negative real return (after taking into account the impact of inflation) or investing in a dynamic, purely equity portfolio.
That is why at Finax, we offer a wide range of 11 portfolios, and we leave the choice of the optimal strategy to always objective algorithms. Nevertheless, we have long recorded demand from clients and non-clients for an additional conservative investment instrument with the lowest possible risk and net return at the level of inflation.
Our answer is the Intelligent Wallet, which completely fulfilled this task. For almost two months, even very conservative investors can save their money in Finax. We have compiled the Wallet from the tax-advantaged ETF index funds, which are exempt from income tax already after 1 year of holding.
There was more than enough paying 19% tax on interests on term deposits and other banking products. With us, you don’t have to pay taxes and your funds are available to you at any time and without any penalty for early withdrawal.
10. Waiting for correction
We have tried to explain many times that there is no need to worry about market risk at all, waiting for a decline usually does not pay off and that more money has been lost waiting for corrections than with market declines themselves.
Despite all the well-meant and statistically based advice, we are constantly receiving questions from potential investors about future market developments and especially their expected decline in the near future.
Waiting to invest a larger amount of money "at the right moment" (usually a decrease of 20 to 30%), however, remains one of the biggest mistakes of all investors and non-investors. But if you really can't help yourself and investing a one-time higher amount of money today is simply inconceivable to you, at least try to protect it from inflation.
What do you get from a 20% drop when you have to wait for it for 4 years, during which your investment could have increased by 40%? Would it not be better to increase the free funds by at least about 2.5% per year? In case the expected correction does not occur, or you miss it again, you can still have earned at least 10%.
When do Intelligent Investing portfolios get already more appropriate?
There is no universal answer to this question, but personally, with an investment horizon longer than 3 to 5 years, I would prefer portfolios with a higher share of stocks (at least 30-50%) and thus a higher expected return. With a longer investment horizon, the best friend of a good investment - time – lends a helping hand to the investors.
An appropriate choice of investment strategy and patience can bring very nice results in the 5-year horizon. The average net annual return on our strategy, which included 50% stocks and 50% bonds (Finax 50/50), reached a nice 5.78% per annum at the end of July. Even the conservative Finax 30/70 portfolio (with only a 30% share of stocks) recorded a net annual return well above the inflation rate - 3.50% p.a.
We believe that by introducing the Intelligent Wallet, we have assured you that Finax is the right place for your money.
If you use less profitable and tax-inefficient mutual funds for short-term investments, do not hesitate to transfer your investment to Finax. We will reward you with a transfer of investment discount - we will manage 50% of the transferred investment for 2 years completely free of charge for you.
How to open an Intelligent Wallet?
Finax clients can open the Intelligent Wallet simply by clicking the Open New Account button after logging in to their account. If you are not yet our client, start by creating an account with the Intelligent Wallet goal.
Do you need more information? Do not hesitate to contact us by e-mail at email@example.com or call us on 02/2100 9985. You can also schedule a 15-minute call for a time that suits you. Feel free to ask, we will be happy to explain everything to you.
Do you have another idea for utilizing the Intelligent Wallet? Write to us at firstname.lastname@example.org and we will be happy to add your suggestion to the blog and talk about it in our podcasts.