Wars, the climate crisis, and the Swiss economy’s struggles – 2023 has been a year of significant challenges. In response, the quest for financial security has intensified. Many wonder: How can I navigate these times without financial loss? How do I grow my wealth despite the odds? Where are my opportunities to save money without sacrificing life’s pleasures? This article tackles these pressing questions.
Saving effectively
The truth is, building wealth is fundamentally about saving. If you have a regular income that not only meets your basic needs but also leaves a bit extra, you’re in a position to accumulate a considerable amount over time.
What many overlook, however, is the art of saving money effectively. It’s essential to understand the nuances of when and how to save. The internet is awash with advice, but sifting through to find what’s pertinent and practical for your situation can be daunting.
This article explores the various facets of saving, offering clarity on the concepts, outlining diverse saving avenues, and spotlighting your potential to save. Ready to dive in? Let’s begin.
Understanding saving: What it is and what it’s not
It’s interesting how the concept of “saving” in German comes with its subtleties, embodying two contrasting ideas.
Firstly, there’s the notion of saving as “cutting back.” For example, someone who becomes unemployed might have to reduce expenses due to decreased income. Opting to cook at home instead of dining out is a typical move to maintain overall living standards. This scenario also introduces the term “negative savings,” relevant when households are in debt or have a negative net worth – often a trigger for significant lifestyle adjustments.
Then there’s saving as “accumulating.” This is when individuals have more money than their immediate expenses and are actively working towards wealth accumulation. This form of saving should be purposeful and, ideally, follow a strategic plan. After all, saving isn’t just about hoarding cash. Yet, in reality, it often is perceived as such.
“There’s no interest anyway,” many think, leaving their money in savings accounts, settling for minimal returns. Or, “Those few francs aren’t worth it,” they conclude, neglecting the fact that even small amounts can grow significantly over time.
The most common oversight? People often undervalue their capacity to save and fail to explore alternatives to traditional savings accounts. Moreover, many confuse saving with investing, mistakenly believing that saving inherently involves risk and potential financial jeopardy. We’ll address this misconception in more detail as we proceed.
Fundamentally, saving money for wealth building should be about “positive” saving. This involves using money that remains after covering all expenses, including a buffer for unexpected costs like a sudden appliance repair. This “surplus” should be a regular, investable amount.
Contrary to what many believe, aiming to amass wealth by significantly compromising on life quality, by saving money that isn’t truly spare, is a strategy best avoided.
Understanding the differences between saving and investing
As we briefly touched on earlier, saving and investing are both pivotal in personal finance management, yet they differ significantly.
Saving is primarily about keeping your money both safe and accessible. This means you can quickly tap into these funds when necessary. The risk of devaluation is minimal, but so is the potential for earnings.
Investing, on the other hand, comes with considerably higher and varied risks.
Investments are generally not readily accessible in the short term but offer the potential for much higher returns. Moreover, investments often aim for long-term goals, like funding your children’s education or ensuring a financially comfortable retirement.
The long-term approach to investing isn’t just a preference but a strategy. Market fluctuations are a standard feature of investing; they’ve always been there and always will be. By diversifying your investments and planning for the long haul, you can minimize these inherent risks. It’s over the long term that the advantages of gradually rising markets make a significant impact.
In contrast, saving typically revolves around a short-term strategy. So, which is better, and which approach should you adopt for your finances?
The answer isn’t one-size-fits-all. It heavily depends on a variety of personal factors and circ*mstances. It’s essential, therefore, to understand your own financial situation and determine when it’s best to save and when to invest.
Weighing the advantages and disadvantages of saving
In the context of important financial decisions, saving money is not a straightforward yes or no proposition. It requires a personal evaluation of its benefits and drawbacks to guide your choices.
Starting with the drawbacks, the most notable one is the typically low yield of savings.
Savings accounts might seem a tad old-school. The idea of setting money aside doesn’t exactly scream excitement. As previously mentioned, this often results in people letting their funds stagnate in traditional savings accounts, not bothering to look for more rewarding options – especially when they think the amount is too trivial to matter. But as we’ll discover, even small amounts can be worthwhile.
Another downside to consider is inflation, which can eat into your savings returns – a concern that is currently very relevant in Switzerland. Yes, this is a real disadvantage, but the presence of inflation makes finding the most attractive saving options even more crucial, right?
Then there’s the concept of opportunity costs. These aren’t direct out-of-pocket expenses but represent the potential gains you miss out on by not choosing better alternatives. These “costs of missed opportunities” can be significant, not only when compared to riskier, higher-yielding investments but also within the more profitable options in the saving category.
Moving to the benefits of saving, one key advantage is that regular saving contributes to building an “emergency fund.” This means you can comfortably handle larger expenses, like buying a new washing machine, a smartphone, or planning a holiday, without stress – in addition to maintaining a necessary “basic reserve” for unexpected costs like that earlier-mentioned vacuum cleaner.
The second benefit is the extremely low risk of loss. Put simply, your saved money is quite safe, especially with the added layer of protection provided by state-regulated bank deposit insurance schemes.
Finding your ideal savings rate
Earlier, we discussed saving only what’s left after monthly expenses. But is there a way to pinpoint this amount more precisely? The answer is both yes and no.
The amount “left over” varies from person to person. What does it really mean for you? How should it be defined? Furthermore, determining the perfect savings rate is not as simple as it seems. Different organizations and experts use various parameters and methods for their calculations. There’s no one-size-fits-all answer to the ideal savings rate.
Nevertheless, there are reliable ways to get a good estimate. Often, the answer lies in balancing different approaches. For a practical tool, we recommend the savings rate calculator from “ChooseFI”. This user-friendly tool helps you quickly figure out a savings rate that might work for you.
Another excellent resource is the calculator from “My Money Wizard”, which offers a slightly different approach.
To get the most accurate picture of your ideal savings rate, try using both calculators and compare their outcomes. You’ll find other calculators online, but be mindful of their reliability. It’s advisable to stick to just a couple of trusted tools to avoid confusion and an overload of information.
Selecting the ideal bank for saving money
When selecting the right bank for your savings, it’s fine to trust your gut feeling, but don’t forget to use your head as well. After all, it’s about your money and its value!
It’s also crucial to distinguish between irrational and rational reasons in your choice. The argument “I’ve always banked with XY” is understandable, but it can fundamentally block you from exploring alternatives. On the other hand, if personal banking advice is important to you, take this seriously and choose a bank that doesn’t skimp on this service.
Consider this: ideally, you and your bank should form a long-term, strong partnership. Despite its importance, people often give less thought to this choice, perhaps because of its overwhelming significance. Human inertia is a real factor in this decision. Investopedia provides many criteria and tips to assist in choosing the best bank for your needs.
Beyond a basic gut feeling, it’s crucial to consider some tangible factors. These include the fees and interest rates the bank offers: Are they competitively high? Do they offer a good combination of benefits?
More crucially, beware of banks promising exorbitant interest rates, which could be a sign of unreliability. Ensure your bank has a FINMA license to safeguard your investment and avoid potential nightmares.
Another aspect to consider is your broader banking needs. Might you need a checking account or consider investments in the future? The right bank should cater to all your financial needs.
Lastly, think about the feasibility of switching banks. Can you really leave your bank after so many years? Will your trusted bank advisor be disappointed?
While some personal disappointment might occur, a true professional will understand your decision to switch, as banking is ultimately a business relationship. In essence, the relationship between you and your bank is not a marriage but a mutually beneficial agreement – and the more personable, the better.
Choosing the right savings account
The ideal savings account offers a balanced mix of low fees and attractive interest rates. We’ve extensively discussed the background and importance of interest rates elsewhere. If you’re interested in delving deeper, you can read the article here: Understanding Interest Rates in Switzerland
Additionally, there’s much to say about compound interest. For more in-depth information on this topic, we recommend the following article: The Power of Compound Interest: Making Your Money Work
Overall, there’s a wide spectrum of savings accounts with varying conditions. For instance, some accounts offer relatively high interest rates but restrict access to your funds. Others might have attractive fees but come with zero interest. Then there are banks that provide good conditions and attractive interest rates but lack any advisory service. Which model suits you best?
We suggest creating a priority list and incorporating it into your decision. And a solid bank that charges low fees, offers attractive interest rates, and provides personal advice can’t be a wrong choice, right?
Our 5 quick tips on saving
- Track your expenses.
- Set a savings budget.
- Define your short-term and long-term savings goals.
- Save for yourself and your goals.
- Save with the right bank and the right account to earn good returns.
The takeaway
Saving money is traditional but also effective. It’s worthwhile, carrying minimal risks. It’s better than its reputation and pays off – in small steps, and unlike investments, it’s available short-term (as well). Think about saving! And if you have any questions, feel free to ask us.
