Families confidently manage their monthly expenses and proactively save for various purposes. With that in mind, Euroconsumers Invest built the Money Framework, a simple roadmap providing tips to help investors fulfil their particular needs, such as planning for retirement, buying a new house, education, purchasing a new car, or building an emergency fund.
The roadmap starts with an introduction to the "Money Ecosystem". In this video, you can also see the map showing a pyramid with five money management levels and two support steps you can read one by one:
It is crucial to understand that saving and investing are not interchangeable. Improperly managing investment products, such as failing to diversify and investing in short-term products like demand deposits, term deposits, or savings deposits, can have disastrous long-term consequences.
It is also important to consider the household savings, average deposit, and inflation rates.
And let's not forget that saving is not the same as investing. Accumulating savings without properly managing investment products in terms of diversification and remaining forever in short-term products such as demand deposits (or current accounts), fixed-term deposits, or savings deposits has a high chance of being disastrous in the long run.
To underline our view, let's look at the household savings, average deposit, and inflation rates in a European context, using examples from the countries where Euroconsumers Invest operates, such as Luxembourg, Belgium, Portugal and Spain, or indirectly, where advisory products are distributed locally, such as in Italy.
In 2022, the gross household savings rate was 12.7% in the 27-country European Union (source: Eurostat, November 2023) and 13.7% in the eurozone. Of course, the rates are not uniform and vary significantly from country to country.
In countries where wages are higher, and families have more purchasing power, the rates in 2022 were high. This is the case in Luxembourg, with 18.1%, surpassed by the rates of Swiss, German and Dutch households only, and in Belgium, with 12.9%, already below the euro area average of 13.7%.
The countries of the South have experienced more significant difficulties in terms of the framework conditions, with debt burdens and various crises over the last 20 years, or in terms of household consumption, with very high inflation in the previous two years or restrictions on wage increases, have lower savings rates. In 2022, the household saving rate in Italy, Spain and Portugal stood at 9.8%, 7.6% and 6.5% respectively. These figures are below historical levels and the recommended minimum of 10%.
But if saving is difficult enough and requires planning, the amount to invest in the short term and the choice of product make all the difference. Let's look at the banks' generosity compared to the evolution of the European Central Bank's interest rates.
The 12-month Euribor average in 2022 was 1.09%. Simply put, Euribor is the rate at which banks lend money to each other. The rate at which a prime bank is willing to lend funds in euro to another prime bank. The EURIBOR is calculated daily for interbank deposits with a maturity of one week and one to 12 months as the average of the daily offer rates of a representative panel of prime banks, rounded to three decimal places.
Already in 2023, the 12-month Euribor average was 3.86%, the result of the substantial rise of the directive rates (which rose to combat high inflation in the countries of the European Union).
We also wanted to highlight the evolution of the 12-month Euribor in 2023 to show the apparent mismatch of banks in the allocation of deposit interest rates compatible with these values.
In some countries, housing loans are indexed to rates, so the increase is immediate, saving but not harming households (consumers) and savers.
While the Central Bank's master refinancing rate was already 4.5% (as of September 20) and 4% for deposits in November 2023, the 12-month Euribor rate was 4.02%. However, the rate for new bank deposits was, on average, in that same period, in the European area of 3.29%!
It is well known that many savers had - and still have in early 2024 - near-zero savings account rates or shallow long-term deposits rates. One piece of advice: review the conditions of ALL your financial products regulary, particularly short-term ones.
Earnings can be very significant
European households lose millions and millions of dollars by their passivity in managing savings.
Another critical reference for households: don't put much of your financial assets in short-term products. This means that they are usually low-income products. Look to diversify and invest in the long term.
You have at your disposal products with tax benefits, such as pension plans or products for retirement, equity, bond funds, mixed funds (shares and bonds), real estate funds or direct investment in shares, bonds or real estate.
Each item has its weight and measurement
We do not recommend investing everything in stocks, bonds, or real estate. You must build your portfolio and allocate your assets according to your situation (age, objectives, investments, etc.). Don't hesitate to contact a financial advisor. You'll see that the approach pays off, even if it's to help you diagnose your portfolio.
Ensure that the interest rate on your deposit exceeds the inflation forecast for the year or within the deposit.
Just to share an idea that could be very damaging to your heritage. If you lose 2% per annum (remuneration discounted from inflation), the purchasing power lost is 16.6% after ten years. After 20 years, 31.9% (lost a third of what he bought before with the money he invested) and 30 years, the loss is almost half (44.3%) - otherwise, if you have 10,000 euros in these conditions, after 30 years, you only buy the equivalent of 5 570 euros!
Instead of becoming more prosperous by saving, you can become poorer by saving on the wrong products.
In the analysis of the table above, it should also be remembered that it is difficult to guess what will happen in the coming years. Still, it is recommended that you have a clear idea of what is the inflation estimate in the country where you live and usually invest: when you create a deposit for a certain period, for example, one year, the income you will get from the investment depends on the time you make the deliver to the bank.
For example, by these time of the year (January 2024), if you make a deposit at the average rate proposed by banks for new deposits of 2.62% (last availabe data referring to November 2023) and if inflation in the beginning year is 3.3% (currently expected) will make you loose about 0.7% of purchasing power, after one year!
Have in mind: the rate the bank offers you can even be attractive compared to other institutions and competing products (for example, the title of the short-term state), but you will never have an exact view of your option if you do not consider inflation. The results of its applications have to overcome the inflation rate to gain real gain. This alert is valid for any geography in Europe or outside Europe — a reason why we strive for more financial literacy.
Financial Literacy is everyone's mission: governments, supranational entities (such as the European Commission), regulators, universities, families and, more than ever, companies. Euroconsumers Invest believes that companies should include Financial Education in development plans for their staff. Companies are the most dynamic economic agents and are great actors in reducing this knowledge gap.
Keep in mind
Don't let all your money sit on short-term products. Diversify and apply based on your profile and savings objectives. Never delude yourself with the advertised rate. Always take inflation into account.