Is Your Savings Account Quietly Losing You Money?
Keeping money in the bank protects it from market fluctuations, but inflation can reduce what those savings will buy. How much should remain in cash, and when does investing make more sense?
Money held in a savings account can lose purchasing power even when the balance continues to grow. This happens when inflation pushes up the cost of goods and services faster than the bank pays interest, leaving savers with more money in their accounts but less spending power.
For anyone building an emergency fund or putting money aside for a major purchase, a savings account remains an essential part of managing their finances. Yet keeping all available savings in cash, particularly over several years, can become costly.
Protecting money from short-term losses and making sure it holds its value over the long term are two different things, and they need to be approached differently.
What Inflation Does to Your Savings
Inflation reduces the value of money gradually, which makes the loss easy to overlook. Unlike a fall in the stock market, it does not appear as a negative figure on a bank statement.
Take a savings balance of CHF 20’000 earning annual interest of 1%, with inflation running at 3%. After one year, the account would hold CHF 20’200 before any tax, but the goods and services that previously cost CHF 20’000 would now cost CHF 20’600.
The saver has earned CHF 200 in interest while the cost of buying the same things has risen by CHF 600.
Over longer periods, the difference becomes more noticeable. If inflation remained at 3% annually, something costing CHF 20’000 today would cost approximately CHF 26’878 in 10 years. An account paying 1% annually would grow to around CHF 22’092 over the same period, assuming the interest was kept in the account and compounded.
These are examples rather than forecasts. Inflation and savings rates change over time, sometimes substantially, and the interest available on a particular account may also change.
What matters is how the two compare. A savings account protects purchasing power only when its return after tax keeps pace with inflation.
Why Keeping Cash Still Makes Sense
Cash serves a purpose that investments cannot always fulfil. It allows people to cover unexpected expenses, pay their bills and make planned purchases without selling investments at the wrong time.
An emergency fund should therefore remain easy to access, preferably in an account that pays competitive interest without restricting withdrawals.
Financial planners often suggest keeping enough cash to cover three to six months of essential living expenses, although the right amount depends on job security, family responsibilities and other sources of income.
A self-employed professional with irregular earnings may need a larger reserve than someone with a stable salary. Homeowners facing possible repairs, or people supporting relatives, may also prefer to keep more money available.
Money set aside for a property deposit, renovation or another expense within the next year or two generally belongs in lower-risk savings rather than investments whose value could fall shortly before the money is needed.
Savings accounts also offer protections that investment products do not necessarily provide. In the European Union, eligible bank deposits are generally protected up to EUR 100’000 per depositor per bank under national deposit-guarantee schemes. Switzerland has a separate system, with eligible deposits generally protected up to CHF 100’000 per customer per bank.
The rules, eligibility conditions and treatment of particular accounts should always be checked before depositing large sums.
When Investing Becomes Worth Considering
Money that will not be needed for several years can potentially earn higher returns through investments, although those returns come with risks.
A diversified investment portfolio may include shares, bonds and funds that hold assets across different companies, industries and markets. Unlike money in a savings account, its value can rise and fall, sometimes sharply.
Investors have the opportunity to benefit from economic growth and receive income from their investments over time. Reinvesting that income can also help their money grow through compounding.
Exchange-traded funds, or ETFs, offer one way to invest across a wide range of assets without buying every share or bond individually. Some follow major stock-market indices, while others invest in bonds or particular sectors.
An ETF is not automatically a low-risk investment, however. Its performance and risk depend on the assets it holds, its costs and, where applicable, its exposure to different currencies.
Someone saving for retirement in 25 years may be able to cope with temporary market declines that would be unacceptable for money needed to buy a home next summer.
Investment decisions should begin with what the money is for and when it will be needed, rather than the search for a particular product.
The Interest Rate Deserves a Closer Look
Many savers continue using the account they opened years ago without checking whether its interest rate is still competitive.
Banks offer different rates on current accounts, easy-access savings and fixed-term deposits. Some advertise attractive introductory rates that expire after a few months, while others require a minimum balance or restrict withdrawals.
A fixed-term deposit may offer a guaranteed rate for an agreed period, but accessing the money early can involve penalties or may not be permitted.
Before moving savings, compare the annual interest rate, whether it is fixed or variable, any fees, withdrawal conditions and the protection available if the bank fails.
Taxes also affect the amount earned. Interest income is taxed differently across countries, so the advertised rate may not represent the amount a saver actually receives.
For larger balances, even a small difference in interest can add up. On CHF 30’000, an additional percentage point of annual interest produces CHF 300 more before tax, assuming the rate applies for the full year.
How to Divide Your Savings
A good starting point is to separate money according to when it will be spent. Cash needed for bills and everyday expenses should remain easy to access. Emergency savings need similar access, while money for planned purchases may be kept in accounts offering higher interest in exchange for withdrawal restrictions.
Money intended for retirement or another long-term goal can be considered separately for investment, taking account of personal circumstances and how much risk the owner is comfortable taking.
Regular transfers can make saving easier. Arranging for an affordable amount to move into savings or investments shortly after payday removes the need to make the same decision every month.
The amount does not need to be large at first. Building a routine that is easy to stick to, checking fees and increasing contributions when earnings allow can be easier than committing to an ambitious sum and repeatedly withdrawing it.
Bank savings and investments serve different purposes. Cash gives people access to money when they need it; investments offer the possibility of longer-term growth, although losses are also possible. A financial plan needs both, in proportions that reflect how the money will eventually be used.
