As this blog is part of a series on inflation, I will not repeat the basics of what inflation is and what causes it. If you’re interested in these topics, I highly recommend the previous blog from this series. In this text, we will deal with bank savings and explain how this money loses its real value every year. We will also explore why we earn such low interest rates on our savings and what to do about it.

Are You Losing Money Without Realizing It?

Citizens of the Eurozone hold more than 9 trillion euros in bank deposit products, representing a significant portion of the total wealth of European households. Unfortunately, most of this amount achieves negligible returns, which is a reason for serious concern. At a time scarred by heightened inflation which continuously increases the cost of living, savings should be key to preserving the financial stability of individuals and families.

However, the fact that money in bank accounts brings almost no return to depositors raises questions about the efficiency of such savings. This should encourage all savers to reconsider their financial strategies. When the conditions offered by banks are analyzed in more detail, it becomes obvious that the interest rates on savings accounts are extremely low.

For example, the interest rate on overnight deposits (these include savings or current accounts from which you can withdraw your money immediately) is only 0.38%. This means that for every 100 euros deposited, the account owner receives only 38 cents in interest per year. Term accounts, which require the locking of funds for a specified period, offer better conditions, currently yielding 3.03% per year on average. However, considering the fact that Eurozone inflation reached an average annual rate of 3.8% over the last 5 years (computed using the price index data listed here), it becomes clear that these products are not offering much protection.

This shows why some savers are currently looking for alternative ways of investing to ensure that their funds do not lose value. However, despite the low rates on bank deposits, European citizens still keep significant amounts in their accounts, getting hit by inflation year after year.

To better understand this situation, it is necessary to look at how much banks earn on these same funds. The European Central Bank (ECB) offers interest rates of 3.75% on funds that banks hold with it. This means that banks make a significant income on the money they lend to the ECB, but only a small fraction of that income is passed on to savers through the interest they offer on savings accounts (remember the average interest rate of 0.38%).

Also, a significant part of the funds that clients keep in their bank accounts is used to issue loans to other clients, often at interest rates between 4-7%. This allows banks to make additional profit on their clients' accounts. Last year, the 20 biggest European continental banks made a combined profit of more than €100 billion for the first time in history, boosted by the high interest rates they can earn on client money.

This disparity between what banks earn and what they offer their customers clearly illustrates the problem that depositors face. While the banks are making record returns on the assets they hold, those who lend money to the banks - the depositors - are only getting a small slice of the pie.

One of my colleagues pointed out in his article that Europeans were said to be more likely to walk away from their marriage than from their bank. This begs the question: why do we remain loyal to banks that clearly prioritize their profits over our financial well-being? Their shareholders are enjoying record earnings while we’re left with "peanuts". That doesn't sound like a healthy relationship to me!

How Inflation Affects Your Savings?

Inflation is a long-term economic phenomenon that reduces the purchasing power of money over time. For example, although 100 euros nominally today will still be 100 euros ten years from now, the real value of those 100 euros will be significantly reduced due to inflation.

To better understand this concept, let’s consider a specific example. Eurostat data reveal that consumer prices in the Eurozone have risen by almost 33 % since 2011. This implies that 10,000 euros today would only purchase what 7,559 euros could buy at the beginning of 2011. The graph below illustrates the gradual decline in purchasing power resulting from this inflation.

In other words, if you kept money in a bank account or in cash during that period, you would be able to buy 32.3 % less for your money today than before. If you failed to invest your savings to at least keep up with inflation at an average of 2.13 % per year, the real value of your savings decreased. You've likely noticed this in your daily spending too – the same amount of money now fills your shopping basket with far fewer items than it used to.

Looking at the same example from a different perspective, we can see that what cost 10,000 euros 13 years ago would now cost 13,230 euros (10,000 x (1+32.3%)). This highlights how much deeper we need to reach into our pockets today.

These examples demonstrate how the real purchasing power of money changes over time. But now we are faced with the logical question of…

...How to Protect Our Savings Against Inflation?

As banks do not offer adequate protection against inflation, we have to look for alternative solutions. Luckily, globalization and the development of technology have brought new options to meet our financial needs.

Instead of relying on traditional banking products, we can use financial instruments with minimal risk that are directly linked to the deposit rate of the European Central Bank (ECB). This rate, which banks often enjoy in full when depositing their own reserves, currently stands at 3.75 %.

In a world where banks, with no regard for consumers, keep huge profits by using favorable interest rates, we as consumers can turn the tide and take advantage of these same opportunities to secure our own financial future. In a dynamic financial environment where the banking sector often reacts sluggishly to changes and innovations, it is necessary for us to take the initiative to optimize our financial strategies, especially to protect against market instability and inflation.

It is for this reason that our Smart Deposit not only protects the value of your money from inflation, but also gives you the opportunity to take advantage of higher interest rates , just like the big banks. The Smart Deposit is our most conservative investment product ideal for storing short-term savings, even for periods of less than 1 year. Its offers a stable yield that gets paid out every day, offering an attractive alternative to classic savings and term accounts.

The Smart Deposit uses financial instruments that copy the fundamental interest rates of the Eurozone. Thanks to this, its value is constantly growing. The yield changes only when the European Central Bank adjusts its key rates. This product is based on ETFs aimed at replicating interbank interest rates denominated in euros and on bond ETFs that include only the least risky bonds with maturities of up to six months and the highest credit ratings.

Its development since launch proves these points. In the picture below, you can see that its growth was very stable (almost a straight line), regardless of what was happening in the economy. You can view the same performance in Dominik's transparent account.

Additionally, this product stands out for its liquidity, meaning you’re not required to lock your money in for a set period, and your funds are accessible on a weekly basis. With the Smart Deposit, you maintain a high level of flexibility.

We must not forget about our Intelligent Wallet, which also contains financial instruments that follow the basic interest rates of the Eurozone, but in a slightly smaller volume. Both portfolios (Smart Deposit and Wallet) consist of debt instruments with fixed interest, and the main difference is in the maturity of these instruments. If you are in doubt which of these two products to choose in your fight against inflation, read this blog where we describe which of these products is more suitable depending on your situation.

Inflation is impossible to beat without careful planning. Only those who prepare in time can avoid its negative effects. Don't underestimate the importance of long-term investments that not only yield higher returns, but also provide better inflation protection over the long term. Long-term investments are not just an option, but a necessary strategy to secure your financial future. The fight against inflation is a marathon, not a sprint, and you're bound to lose if you don't take it seriously.

Make Your Money Work for You

In recent years, banks have reaped substantial profits, largely due to the high interest rates they can get earn on their reserves. However, this system has led to a stark and growing disparity between the high returns banks earn on their assets and the meager interest rates offered to depositors. This imbalance means that while banks profit handsomely, many savers watch the purchasing power of their savings decline.

This situation underscores a critical issue: traditional bank savings accounts are becoming increasingly unprofitable in the face of rising inflation and persistently low interest rates. The current financial environment demands a strategic reevaluation of how savings are managed to mitigate the adverse effects of inflation and optimize returns.

Given this context, it is essential for individuals to actively monitor and adjust their savings strategies. Relying solely on traditional savings accounts may no longer be sufficient to safeguard your financial future. Instead, it is crucial to explore alternative investment options that offer a better protection against inflation and the potential for higher returns.

Now is the time to take control of your financial future. Don’t let your hard-earned money lose value due to inadequate interest rates. Today, as we have shown, there are effective ways of investing that can help you fight inflation. These products are designed to protect your savings, giving you the liquidity and flexibility you deserve.

Don’t let your money line the pockets of banks. Instead, protect your savings and boost your purchasing power. It's time to turn the table and make bigger returns!

Investing is associated with risk. Past performance is no guarantee of future returns, and your investment may result in a loss. Inform yourself about the risks involved in investing.

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