Savings accounts and fixed-term deposits
You can get at instant access savings any day, but the interest rate can change. A fixed term deposit locks your money up for a set time at a fixed rate. Both are for parking money safely, not for building wealth.
Learning objective: After this lesson you can tell instant access savings and fixed term deposits apart and judge what each is good for.
Instant access savings are the account for your emergency fund. You can get at your money any time, but the bank can change the rate any time too. Teaser rates for new customers often drop noticeably after just a few months.
Fixed deposits and terms
A fixed term deposit usually pays a bit more, but you can't get at the money until the term ends. That suits money with a fixed date. If Aylin is saving for a car she wants to buy in two years, she can lock the money up for two years.
Deposit insurance
In the EU both are protected by statutory deposit insurance up to €100,000 per customer and bank. If you have more, spread it across several banks.
What is left after deductions
After tax and inflation, usually little or nothing is left with either. They're there to keep money safe. Anyone trying to build wealth with them wonders after twenty years why so little came of it.
Deposit insurance applies per customer and per bank. Watch out: several brands can belong to the same bank. If you have €80,000 each at two brands of the same bank, only €100,000 in total is protected. With foreign banks you find through deposit platforms, their home country's scheme applies. How well it pays in an emergency also depends on how financially strong that country is.
Why fixed deposits pay more
There's a reason fixed term deposits pay more than instant access. The bank pays you for being able to plan firmly with your money. Sometimes, though, short terms pay more than long ones. Experts call this an inverted yield curve. Then it's hardly worth locking money up for long.
Interest after tax and inflation
What decides is what's left after tax and inflation. An example: 3 percent interest, of which about 26 percent goes on German capital gains tax, leaves about 2.2 percent. If prices rise 3 percent, you're at roughly minus 0.8 percent in real terms. That's no outlier. Over long periods, interest on bank accounts after tax and inflation has often been around zero or below.
| Savings account | Fixed-term deposit | |
|---|---|---|
| Access | any time | only at maturity |
| Interest rate | can change any time | fixed for the term |
| Typical level | usually a bit lower | usually a bit higher |
| Good for | emergency fund | a goal with a fixed date |
| Protection | deposit insurance up to €100,000 | deposit insurance up to €100,000 |
| After tax and inflation | often around or below zero | often around or below zero |
Summary
- Instant access for your emergency fund, fixed term for goals with a fixed date.
- Deposit insurance applies per customer and bank, not per brand.
- After tax and inflation usually little or nothing is left.
Did you get it?
What is a fixed term deposit good for, and what not?
For money with a fixed date. Not for your emergency fund, because you can't get at it.
What should you watch out for with deposit insurance?
That several brands can belong to the same bank. The protection then only applies once.
What's usually left after tax and inflation?
Often roughly zero or less. Savings accounts usually don't preserve purchasing power.
Check your understanding
Your task
You have $12,000 in a savings account at 2.5 percent, and inflation is 3 percent. Calculate the interest in dollars for one year and the loss of purchasing power in dollars (3 percent of $12,000). Write down the difference and think about what job this money can still do in that account.
Sources and further reading
- The European Commission on the EU's statutory deposit guarantee of up to €100,000 per depositor and bank. View source ↗
Related
- Collectibles and tangible assetsStage 1
- Before you invest a single euroStage 0
- The emergency fundStage 0
- Matching questions for this stageQuestions