Bank deposit as a form of investment
Bank deposits are one of the best known forms of investment, gaining a significant place in the investment portfolios of many people. This solution could have been used in one form or another by our grandparents. Currently, due to its popularity, the central banks (like the Hungarian National Bank) also consider it important to write an educational article about it.
What did you learn from your parents or at school? If you have saved money, go to the bank and make a deposit. But the time changes. It’s no business secret, but it’s no coincidence that if you go into the very first bank branch, there’s a very small chance you’ll be told not to leave money there for many years because you’re going to lose your purchasing power. As if it didn’t matter. In most places, attention may be drawn to interest tax exemptions after 5 years, or some promotions.
Is your money safe in a bank deposit?
If you keep your money in a bank deposit, the NDIF guarantees that even if the bank declares bankruptcy, your money will remain.
We can tick things about the amount. But don’t consider value. Take a look at the rate of inflation recorded globaly.
3-4% inflation doesn’t sound like much, but you have no control over its current rate. If you don’t get that much on your money, it will lose value even if it stays the same numerically.
For you, impairment means so much as an individual
One of my dear acquaintances told me about this incident, which actually happened. At the beginning of the 2000s, a good friend had HUF 2 million in cash. Either way he tried to explain to him that it wasn’t going to be good, he didn’t listen to him because “the money’s best place in his belt bag”. Then this friend was most amazed that no one considered him a really wealthy person anymore.
For comparison: in Szeged in the 2000s you could buy 4 studios out of HUF 2 million. 10 years later, the deductible was enough for only 1 apartment. And today? You don’t even want to furnish a studio out of this.
That’s exactly what happens to your money. Just because the process is slow, so just like the above person, you can’t necessarily detect it in time. About like high blood pressure.
Impairment losses due to inflation appear on a different scale as a business
Maybe 2 million forints (it is about 5.800 euro) is nothing for you. You may also have a company where you work with much larger numbers.
Now think about what happens when you e.g. you want to open a site. Together with land, the main building, the warehouse, the equipment, the manpower, you will spend, say, 500 million forints (cc. 1.5 million euros) on it. You closed a good year, you could buy it for cash in one of the best places, or if you don’t have it for 100% cash, but you have the deductible.
But you still can’t find a plot of land for sale right away or something always happens during this time. Since you don’t make a living from looking for land either, your attention is distracted, you deal with your daily affairs. It takes 1 year and you don’t have the plot. What if it doesn’t take 1 year? What happened to your money? We are no longer talking about the two million. The bank is working on your money, winning on it, and you can only congratulate it.
Why does the bank give so little interest on time deposits?
At the time, you could learn at school that what a bank collects as a deposit is put out as a loan. So you can say that it is in their interest to collect as many deposits as possible so that they have something to lend. And they can encourage the collection of deposits with high interest rates.
The very romantic idea is that a bank looks like this:
It was pink romance. Because if that were such a high priority for banks, they would be trampling on each other to encourage new customers to make bank deposits, that is, to raise new capital.
The bank does not only have capital that can be outsourced from its customers. They have existing capital that they can invest in the economy. Whether as a loan or through stock exchange trading. And they can also get money from the European Central Bank. So they simply don’t care if you bring in money or not.
How much interest can you get on your bank deposit?
If not elsewhere, the figure below shows that the bank gives very little interest on bank deposits, we can’t talk about value stability at all, so the story is limping somewhere.
(Since the source of this is the Hungarian National Bank, I did not want to edit the picture. A white column indicates new contracts, a gray column shows new contracts seasonally adjusted, and dots indicate the interest rate. But as I mentioned at the inflation, you can meet something like that everywhere)
And yet the bank deposit is successful…
Looking at the chart below, you can see that huge amounts of money are still in bank deposits. This is partly due to a lack of financial knowledge and partly due to tradition. There is not enough knowledge about what else money can be invested in, and it is so because of the power of habit.
What can you see in the picture above?
The fact that the rate of household savings has increased at an unprecedented rate. Fortunately, part of this went to government securities, which provide higher interest rates than bank deposits. (At least the Hungarian ones, but the interest rates of the government securities depend on lots of thing.)
Less good news is that the rate of investment has not developed as dynamically as would be justified for long-term savings. This is because the units invest the money in mutual funds, with which you can achieve even the following returns.
Why was a bank deposit good a long time ago?
If we look back as far as the 60s, we see that we can’t really talk about an investment culture. If they didn’t want to keep the money in the pillow case, they looked for a place where it was safe and got some interest on it. The bank deposit available in the form of a savings book was perfect for this.
If you think about how much more advanced became the multitude of tools available in your own profession, so has finance.
If you have a design office, I don’t think you’re trying to exist on a 486 machine under DOS, or Windows 3.1, and store your things on the A: drive disks. What was a top model at the time and everyone was chilled out of it is now used for nostalgia. The same is true with bank deposits. It was still very good at the time, as it wasn’t really necessarily anything else, and the financial culture itself didn’t really allow you to think differently.
Overview of bank deposits
Types of bank deposits
Bank deposits can be grouped in many ways. These groupings can be:
- by time period: from 1 month you can find commitments for more than a year
- by currency: you can place a term deposit in domestic currency or in a currency specified by the bank
- according to the method of depositing: the deposit can be one-time or recurring (in the latter case you can choose to tie the earned interest again together with the capital in order to work with compound interest)
- according to the interest rate method: you can choose from fixed, variable, changeable or band interest rates
- by purpose: general term deposit or assigned to a purpose. The latter can be, for example, prize deposits or even time deposits made by the guardianship authority.
Use of bank deposits
Bank deposit in general form
That is, when you “just” deposit your money. Use it at most if you want to “label” the amount of your summer vacation or an upcoming expenditure. That is, in January, you know how much the trip will cost in July, you commit that amount, and so it is sure that you don’t spend it carelessly, or because you’re seduced by the effectiveness of the marketing machinery.
You can use this in other ways. There is very little chance that your coupon will be drawn as a winner. Especially if you choose a low denomination for your car prize. The latter is declared by most distributors on their own websites.
Accordingly, use this type of time deposit if you either have a strong belief in your luck or want to keep a large amount of cash safe for a short time by using it in cash afterwards. A good example of this is house renovation. Let’s say you’ve inherited a larger amount of cash and want to renovate your own house when the good weather comes. Although you can theoretically pay for working masters electronically, cash payment is still the most common. This way, you can keep your money safe in registered deposits for as long as you don’t need it. You can also benefit from the fact that the free redemption also saves you a significant cash withdrawal fee.
However, do not use a bank deposit to build capital
In order for your money to extract inflation, you have to take a risk. Not necessarily much, but definitely more than the risk of a bank deposit or a sight deposit.
If you’ve set yourself a goal that can be expressed in monetary terms (be it a dividend payment, an exit strategy, or just any private goal), it does matter to you how burdensome it is for you to achieve it. In the article on rule 72, I wrote about how much 1% can be.
You worked for a given capital yourself. If you let inflation eat that, you’re throwing your work in the trash.
If you don’t already have the right capital (or even part of your own resources) for a later goal, it matters that you have to work for every penny, or apparently the buoyancy of the economy will help you.
How long will it take, even with interest, but will be 2 out of 1 million as a time deposit in the bank? If we don’t deduct the account management fee and interest tax and look at a fantastically high 0.5%, it’s round 140 years. I don’t have that much time for most of my goals.
When using bank deposits, pay attention to the following
I have already mentioned above that there are some cases where it is mandatory to use a bank deposit. Of course, with a guardianship savings deposit, you don’t have many options to choose from, they do it for you. In all other cases, the tempting offer is likely to be just a honeycomb. Read the terms and conditions carefully. If you don’t understand something, dare to ask either the bank agent or us.
In most cases, what the bank generously gives as interest has already been taken back with the other hand on other terms. For example, you will receive a special interest rate on your time deposit if you request another product. And this other product can cost far more than the extra interest.
Time deposits linked to structured products
There are banks that offer really well sounding offers without linking it to an extra product. In this case, the outstanding interest rate is tied to some underlying, usually stock exchange rate. Thus, the bank time deposit fits into the structure of another product. Hence the name.
A quick example to make it easier to understand:
The bank will tell you that you will not have access to the term deposit for 2 years. In return, they offer extra (but really seductively extra) interest. Provided that the exchange rate of the euro, the exchange rate of oil (anything that has an exchange rate) does not exceed X, it will not move more than X% or will remain in a certain band for these 2 years. If it does, the 0% interest on plain sight will be yours for 2 years.
You can decide if you take advantage of this opportunity. Another issue is that the bank can only win, after all, it has hedged its own risk with options. The question is whether you win. We were looking at a statistic at the time, when I was working in the bank. In the first 6 months of the 2-year period, the rate at which the client lost was 72%.
- Do you typically use a bank deposit? How long do you deposit your money to?
- What are you sure to look at before deciding on a form of investment?
- What do you think is the maximum result you can achieve with a bank deposit?
If you have any questions or want to find a more efficient way to save your money, you can contact us here.