The pitfalls of account saving: zero returns, decreasing value of savings, lost flexibility
Account saving is a familiar and safe form of saving, but nowadays hardly any interest is accrued on accounts. Tanja Eronen, Strategic Leader in Wealth Management at Nordea, advises what savers should do to prepare for surprises and to grow wealthy in a smarter way.
“Now that interest rates are low, the returns on money deposited in a bank account are non-existent. In addition, inflation, that is, the gradual decline of the purchasing power of money, eats away the value of savings to a surprising extent,” Tanja says.
“A lion’s share of the wealth of many Finns consists of owner-occupied housing and account savings. There are risks related to this. For example, you may lose your job or have to deal with some other unwelcome surprises. You would not want to convert your own home into money, and the accumulated returns on savings may be less than you hoped for. Your buffers are insufficient.”
“Mutual funds and shares are smarter alternatives for long-term saving. Returns accumulated on investment over time may be a considerable source of income in addition to earned income or entrepreneurial income. They bring flexibility to your finances and freedom to make your own decisions.”
How to get started?
“Start by finding out how much money you have in your accounts. After that, consider whether you will need to use your savings over the next three years, for example, for a new apartment, renovation or a car. If yes, do not touch your savings. If not, keep a buffer amounting to two or three months’ expenditure in your account and invest the rest. If you invest a larger amount, you should spread your investments, for example, over a period of one year,” Tanja recommends.
“The easiest thing to do is to start by investing in a balanced fund, with the portfolio manager taking care of everything for you. After this, you can explore the available options and consider investing in shares, insurance products, housing, forest or other property.”
What else should you know – and what kind of returns can you expect?
“The main thing is that you start. Secondly, it is important to create an investment plan, which you will implement even when markets fluctuate. Thirdly, I recommend monthly saving. When you always invest part of your salary, the value of savings increases almost automatically.”
Returns are always linked to risk. The return expectations are less than one per cent for extremely safe investments and 2-4 per cent for average risk investments. In case of higher risks, such as when investing in shares, you can expect a return of over 4 per cent. All estimates are long-term revenue expectations.
“Risks can be mitigated, for example, by diversifying your investments over time, geographically and by investment products. In the short term, the value of investments may also decrease. However, you should not be alarmed, as in the long term the value of a diversified portfolio has always increased again and the compound interest effect will also begin to increase the value of savings over time,” Tanja says.