Is it worth leaving money in a savings account?
“I have all the money in the bank. They are safe there, and they even appreciate themselves a little to me,” Czechs often say. But is it really that simple? And if you leave savings in a savings account in a bank, how many to put away there? We will answer that too.
(This article is NOT financial advice)
Savings accounts are heard the most in times of high inflation, when the Czech National Bank raises interest rates. This is exactly what happened in the previous two years, and so today ordinary people can appreciate their money on “savers” by an average of 5-6 percent per year.
Such interest is decent, given the low risk (deposits in savings accounts tend to be generally considered almost risk-free). However, as you will read later in the article, the amount of revenue is need to put in context.
Read in another bloghow Czech and foreign inflation developed in 2023.
What is a savings account and what it is for
In the flood of marketing messages, the main thing often comes into play: why do savings accounts exist and what are they supposed to be for?
The basic idea is that people should put aside money that they do not need, but which at the same time they can at any time use immediately for larger planned and unplanned expenses. This is also where the term “savings account” comes from — it is designed to save funds.
Savings accounts have the advantage over conventional ones that banks pay interest on them. When you leave your finances lying in a checking account, you don't get an extra penny. If, on the other hand, you save them to a “saver”, it will give you Regularly calculate the yield according to the agreed terms. Interest in this case is a reward for keeping money deposited in the bank.
When you leave finances lying in a checking account, you don't get an extra penny. If, on the other hand, you save them to a “saver”, you will receive a return on a regular basis.
It definitely makes sense for most of the population to have savings in a savings account. But it depends on how much money a person saves on it. Because saving is not investing.
In a savings account only necessary reserve, the rest is better to invest
30k, 50k, or 100k? There is no single recommendation determining how much money to put away in a savings account. In general, it is advisable to have an amount on it that will cover the necessary expenses for 3-6 months. It is a kind of insurance in case of loss of income, unexpected expenses and the like.
Finances beyond the reserve mostly make sense to invest. Of course, just in case you know you won't need them anytime soon. Why? Because even though in 2023 savings accounts yielded significantly higher appreciation than in the previous decade, revenues nowhere near covering inflation.
In November 2023, year-on-year inflation in the Czech Republic was 8%, which was the highest among all countries in the European Union.
What to expect from savings accounts in 2024
While until 4 years ago, interest on savings accounts reached a maximum of 1.7%, during 2023 they routinely hit the 6% threshold. Because of high inflation, the Czech National Bank (CNB) has raised the base interest rate up to 7% in recent years, which has allowed ordinary banks to significantly increase interest on savings accounts and to outpace competitors who offer more to their clients.
This year, however, banks will reduce interest on savings accountsbecause the CNB cut the base interest rate in December 2023 for the first time in a long time and indicated that it would continue to fall in small steps.
The base interest rate is a key tool of central banks. They use it to influence economic policy and not only interest on savings accounts, but also interest on mortgages and other commercial loans.
The good news is that inflation will fall. Together with it, interest on bank accounts will also go down.
How much does a savings account make and how much is a long-term stable investment?
Fortunately, people do not have to rely only on the current amount of bank interest, but they can protect against inflation by investing regularly. The difference between saving in a bank and investing for the same length of time can be huge. The examples below illustrate this nicely.
If you would 10 years regularly procrastinated every month 1000 CZK into an interest-rate savings account 5%At the end of this period, you will be saved 155,929 CZK.
If, however, you 10 years Invest regularly every month 1000 CZK into fixed interest opportunities of 10% (this appreciation roughly corresponds to investors' returns on Investown), at the end of this period you should 206,552 CZK. The amount invested and the investment horizon remain the same, but the profit varies by tens of thousands of crowns.
So is it worth putting money into a savings account?
Yes, in a savings account, everyone should have -- if only a little bit possible -- a deferred financial buffer for sudden expenses or worse times. But the rest of the money is better to invest, of course with maximum emphasis on diversification.
There are exceptions, of course. Having hundreds of thousands or even millions of crowns in a savings account is reasonable, especially in the case of expected large expenses (e.g. a mortgage).
This article is not investment advice
Investown does not provide investment advice. This is an educational article with basic information about savings accounts. For specific advice, we recommend using the services of an investment advisor.
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