Saving money is a fundamental aspect of financial well-being, whether you are working towards a future goal, building an emergency fund, or simply looking to grow your wealth over time. Many Swedes have savings accounts set up to earn a small percentage in interest over time. But are you truly making the most of your funds? If you are interested in optimising your savings strategy, this guide will provide you with some information on your options to a brighter financial future.
Savings accounts – key terminology
To begin with, you should first understand some relevant key terms.
A savings rate is the return that you can get on your funds in an interest-bearing savings account. Knowing what the savings rate for an account is is vital, because it directly influences how much your savings can grow and how quickly they can do so. Savings rates are expressed in percentages or ratios, and they can be affected by economic conditions such as the national or global economy.
- What is an Annual Percentage Yield (APY)?
An Annual Percentage Yield (APY) is the total amount of interest earned on a savings account in one year. APY is expressed as a percentage, and it differs from the interest or savings rate in that it accounts for compounding. This means it considers the interest earned on both the initial deposit and any accumulated interest. For many, the APY is a more accurate representation of the total return, and it is a key factor when choosing the best savings account.
- What is a deposit guarantee?
A deposit guarantee, also known as a deposit insurance, is a type of financial protection provided by the government or some other designated entity to protect your deposited funds in your savings account. The purpose of a deposit guarantee is to ensure that depositors – account holders – do not lose their money in the event of bank solvency. Different banks have different coverage limits.
3 ways to make the most of your savings
Use a high-yield savings account
One of the ways you can earn more interest on your money is by putting your money in a high-yield savings account. In Sweden, you can open a deposit account with a traditional bank like Swedbank or save with a niche bank such as Collector and SBAB. Traditional banks typically offer low direct interest – less than 1% – which makes them more suitable for short-term savings and everyday expenses. On the other hand, niche banks can offer interest of up to 3.5%, making them an attractive alternative.
Regardless of the bank you choose to save with, you should always check their account options and terms. Consider not only the savings rate but also the reputation of the bank, the convenience of having an account with them, and the level and quality of customer support that you can get. If you will be making regular deposits and withdrawals to and from the account, you may also consider choosing a provider that waives transaction fees.
Consider Certificates of Deposit (CDs)
You may also want to rethink the type of savings account that you are putting your money into. A Certificate of Deposit (CD) is a type of time-based savings account that typically offers higher interest rates when you agree to depositing a specific amount of money for a fixed period. This can range from a few months to several years. As CDs are designed to hold money for a designated period, you may incur penalties or be rejected should you make a request to withdraw you funds before the maturity date. Nevertheless, CDs can be a good option if you have a lump sum of money that you do not need immediate access to and can afford to not touch for a while.
Open an Investment Savings Account (ISK)
Another option to make the most of your funds is to use them to invest in assets. Many people who want to earn more than just the interest in their savings account may opt for low-risk, long-term investments that can help their savings grow more, over the years. Young people, or those with large incomes and lofty financial goals, can also put their savings in higher-risk, higher-reward investments. There is no right or wrong way to approach investing; it all depends on your risk tolerance and financial objectives.
In Sweden, a popular savings product is the ISK (Investeringssparkonto), which is an Investment Savings Account that became available in January 2012. The ISK makes it easy for account holders to invest in financial instruments such as stocks and ETFs with their savings. Unlike an ordinary trading account, holders do not have to pay capital gains tax on their transactions. Instead, they pay an annual standardised tax based on the value of the assets. ISKs can streamline the tax payment process for Swedes as well, as account holders are not required to report the acquisition or sale of the assets in the account either.
However, keep in mind that investing with your savings may not be a good idea if you are risk averse. The financial markets are unpredictable and there are no guarantees of profits. Before opening an ISK, you should consider whether you can afford to take any risks with your money and do thorough research on the products in which you wish to invest.
Conclusion
Optimising your savings strategy can make a world of difference in the long term. Even if you already have a regular savings account, it certainly does not hurt to consider ways you can continue to grow your wealth. By familiarising yourself with key savings account terminology and considering different options, you can make the most of your hard-earned money and take proactive steps towards maximising your savings.
