Maximizing Cash Returns

Summary

• Introduction

• The Cost of Convenience

• The ECB

• Low Interest, High Comission

• What Options do I Have?

• My Honest Opinion

• Cash Movements

• Useful Links

Introduction

Welcome back, fellow rookie investors!

In today's dynamic financial world, depositing your money in a bank account can result in a gradual loss of its value. This is particularly important to understand whether you are new to investing or have years of experience. The reason behind this is inflation, which can lower the purchasing power of money over time. When your money is not actively earning through investments, its real value is decreasing even if the nominal amount remains the same.

That’s why exploring strategies to prevent the decrease of your money's value and discussing how to effectively use various tools to generate profit is crucial. By understanding and applying these methods, you can safeguard your financial resources against depreciation and even capitalize on opportunities to enhance your financial growth.

The Cost of Convenience

For a lot of people, having a bank account is synonymous with both security and easy access. There is a reassuring sense of comfort in knowing that your funds are safe and immediately accessible whenever you need them. However, this convenience does not come without its downsides. One of the disadvantages is the hidden cost of inflation.

This erosion of purchasing power means that the money you save today may not buy as much in the future. Particularly, if the interest rate your bank offers on your savings is lower than the current rate of inflation, your savings are effectively losing value each year. For example, imagine your bank gives you an interest rate of 1% on your savings, but inflation rises at a rate of 3%. In this scenario, despite the nominal increase in your bank balance, the real value of your money is actually decreasing, rendering your savings less effective over time. This highlights the importance of seeking investment options that can offer returns at least equal to, or greater than, the rate of inflation, to maintain or increase the real value of your financial assets.

The ECB

In Europe, the Central European Bank (ECB) is tasked with overseeing economic stability and managing inflation for the countries within the Eurozone. A key priority for the ECB is to maintain price stability by ensuring inflation remains low, stable, and predictable.

As of December 2023, the ECB has set the interest rates at 4.5%. This rate is significant for anyone holding savings in the bank, as it essentially caps the maximum annual interest rate that banks are “allowed” to offer on savings accounts. In practical terms, if you have 1,000€ in your bank account at the start of the year, with no further transactions impacting this balance, you could expect your savings to grow to 1,045€ by the year's end. This 4.5% interest rate aims to help your savings keep pace with inflation, ensuring that the value of your money is preserved over time.

Low Interest, High Comission

Although the interest rate is set at a maximum of 4.5%, not all banks provide this rate. Traditional banks often offer lower interest rates, typically around 1.5%, and retain a large portion as commission. This practice is one of the various ways banks generate revenue, indirectly causing you to lose money. To optimize the growth of your savings while maintaining immediate access to your funds, considering the use of a neobank or an electronic money institution (EMI) may be a better option.

A Neobank is a type of direct bank that operates entirely online, without traditional physical branches. These banks are a key component of the wider fintech movement, relying on technology to deliver banking services that are more efficient, user-friendly, and very often less expensive than those offered by traditional banks. They usually provide their services through mobile apps and digital platforms, offering a seamless, technology-driven customer experience.

An EMI, on the other hand, is a financial entity licensed to issue electronic money, which is a digital equivalent of cash stored electronically. This e-money represents a claim against the issuing institution and can be used for making payments to parties other than the issuer itself. They play a very important role in the fintech ecosystem by offering different alternatives to traditional banking services. Moreover, they are highly regulated, and must be attached to a set of regulatory standards that can vary depending on the jurisdiction.

What Options do I Have?

The question on many people's minds is: Where can I find the best interest rates? The answer to this varies depending on your location. In Europe, numerous neobanks and EMIs offer competitive interest rates. However, it's crucial to understand the protection offered on your deposits, as well as knowing how much of your money is safeguarded in the event of institutional problems.

Some of the biggest players in this space include Revolut, Wise, and Trade Republic, among others. When choosing where to deposit your money, make sure to consider both the interest benefits and the financial security provided. In my opinion, all three provide good terms, though this varies from person to person. To give you an example, Revolut's interest rates differ depending on your account tier and are credited daily. On the other hand, Trade Republic offers a flat 4% interest rate for all its users, paid out monthly.

My Honest Opinion

I've personally opted to deposit my money with Trade Republic. Transferring funds from my bank, Revolut, is very easy and fast. This doesn’t mean that Trade Republic is the best choice for everyone's savings needs, but in my case, it suits me well. After some deep research, I found that they've been operational for a considerable time, have a good reputation and also offer the option to purchase stocks and bonds. However, as I mentioned in a previous episode, I use a different broker for my investments, as I prefer to keep my savings and investments separate.

In conclusion, choosing the right provider to maximize your money's potential is crucial, especially if you aim to preserve and enhance the value of your funds over time. Next week, we will explain some other Terms in Finances that are important to know.

Before we say our goodbyes, don't forget to check out what my latest transactions were this week down below. Keep smiling, keep learning, and I'll catch you next time!

Trevor

Disclaimer: This post is NOT financial advice. It is intended for educational purposes only. Investing involves risks, and there is a possibility of losing capital. Always conduct thorough research and consider consulting with a financial advisor before making any investment decisions. Your financial well-being is important, so please invest responsibly.

Cash Movements

• 110,77€ to a Savings Account with a 4% interest on cash, paid monthly (total balance of 417,81€)

Useful Links

Be sure to check the following website, where you'll find various links to the apps and websites I use daily. All these resources are free to use, and by utilizing my links, you'll not only support Dividend Rookie but also elevate your financial game to new heights!

Check it out HERE!

Join the Rookie Community today by hitting subscribe! It's totally free and motivates me to continue releasing the weekly “episodes”.