Savings accounts are the most common form of our savings. But are they the best? Let's learn a little more about them and what the best alternatives are for investing your savings.
Savings Accounts
Deposits, especially savings accounts, are the simplest and most common way to save. They function like piggy banks: safe and with immediate availability.
According to the latest publication from the Bank of Portugal, there are approximately 244 billion euros in bank deposits from individuals and businesses in Portugal. This amount represented a recovery of deposited funds throughout 2023, a year in which deposit interest rates were generally increased, bringing them closer to the near-zero percent typical of the last decade. Another event that contributed to the recovery of deposit volumes was the launch of the new series of Treasury Certificates with a downward adjustment of the offered remuneration.
Saving accounts interest rates
Throughout 2023, the average return for savings accounts in Portugal gradually increased from nearly 0% to about 3% for new deposits made in December, surpassing the rates applied in Spain and approaching the eurozone average.
graph 1 - interest rate evolution in the euroarea in 2022 and 2024 (link)
However, not all deposits benefit from these rates; in fact, most deposits with higher interest rates are subject to other usage conditions, such as opening a new account or bringing more money from another bank, or they are only part of the banks' promotional campaigns rather than their current offerings.
Expected evolution for saving accounts return rates
The primary influencing factor for the lower interest rates on saving accounts is the EURIBOR. Simplistically, when banks do not have sufficient liquidity from customers' accounts for their lending activities, they turn to an interbank financing market. EURIBOR rates represent the average cost for this financing. For this reason, regular accounts or savings accounts interest rates rarely exceed the corresponding EURIBOR rate, but on the other hand, the higher the EURIBOR, the greater the incentive for banks to resort to customer deposits and offer better returns.
This is what happened since mid-2022. The 3-month EURIBOR rose from -0.57% at the beginning of 2022 to 3.9% in October 2023. Similarly, the 12-month EURIBOR increased from -0.5% to 4.2% over the same period.
However, more recently, the stabilization of inflation in the Eurozone has already halted further increases in the ECB's key interest rates, and there is already an expectation of downward revision during the year. This has caused longer-term EURIBOR rates to trend downward, with the 12-month EURIBOR falling to 3.5% at the end of January 2024, a decrease of 0.7 percentage points in four months. This trend is expected to continue throughout the year, leading to a reduction in time deposit profitability rates. This impact is already beginning to be visible, with some banks lowering their deposit offerings.
Savings Account Alternatives
The most popular alternative to term deposits in Portugal is the Savings Certificates issued by the government. Typically with interest rates above term deposits, and with loyalty bonuses added in certain situations, this savings instrument experienced a significant increase in demand in the first half of 2023, at a time when term deposit rates were still very low. However, due to the enormous demand for this product, the product's conditions were downgraded in June, with the end of the commercialization of Series E and the beginning of the commercialization of the new Series F. Series F underwent a significant change in the calculation formula, where now the interest rate is capped at 2.5%. In other words, a value below current term deposits. Additionally, Savings Certificates are debt securities, meaning they are subject to credit risk and have more withdrawal restrictions than typical deposits.
Less popular in Portugal are the structured products. They typically guarantee a specific fixed return and feature a variable remuneration, usually dependent on the performance of a specific index of values, such as a basket of stocks. These are low-risk instruments and can offer an attractive return through variable remuneration. However, there is uncertainty about the final return and the lack of immediate liquidity if the investor needs it.
Other alternative products include capitalization insurance funds, particularly the ones with guaranteed returns. Typically, insurers periodically define the remuneration rate that the product will have in the following period or the minimum guaranteed return. These products also benefit from tax advantages for long-term investments in terms of Income Tax, often similar to traditional Personal Retirement Plans (PPRs). On the other hand, these products are designed for long-term savings, which may limit immediate fund withdrawal.
Another typical case of obtaining returns through interest is investing in bonds. Bonds are debt securities issued by companies that commit to paying a certain periodic interest rate and typically have durations of 2 to 5 years. Due to the complexity of the operation, only large companies issue these types of instruments, making them usually low-risk instruments with attractive remuneration rates. However, not all bond offerings are available to retail investors, and in Portugal, the number of issuances per year is limited. Additionally, larger investment amounts are required, they require holding a securities account, which involves costs, and they do not guarantee immediate liquidity.
Investing in Crowdfunding
A newer alternative that has grown exponentially in recent years is investing in crowdfunding. The fundamental premise of crowdfunding is direct financing without the intervention of intermediaries such as banks. Crowdfunding allows investors and savers to apply their savings directly to projects they identify with, in an easy, fast, and transparent manner.
Typically, crowdfunding offers very attractive rates of return and very low or even zero investment costs. In addition, the minimum investment amounts are typically negligible, allowing investors to diversify their investment portfolios even with little money. Investment is typically subject to credit risk; however, crowdfunding platforms are usually cautious in the funding projects they offer and take responsibility for recovering overdue credits. It is also typical for platforms to offer solutions for selling stakes so that investors can obtain liquidity before the term.
Daskapital is one of the new crowdfunding platforms that aims to build bridges between Small and Medium Enterprises (SMEs) with relevant projects in need of funding, and investors and savers who identify with these companies and projects, thereby obtaining very attractive rates of return. At Daskapital, investors decide the return rate they wish to obtain on each project. At Daskapital, investors have access to all project information and its associated risks to make an informed decision. Additionally, there are no associated costs for investment or account maintenance. Sign up for Daskapital and explore our investment solutions. Learn more about investment solutions here.
In Summary
Savings accounts are and will continue to be the cornerstone of savings. However, for long-term savings or to grow your investment, diversification and eventually assuming some risk will likely bring higher returns. Opting for Savings Certificates, typically the first choice after the traditional accounts has become less appealing, so considering other options for your money is advisable. But there are numerous options available, from stocks to bonds, from investment funds to ETFs. It's just a matter of choosing what suits you best. More recently, credible crowdfunding investment solutions have emerged as good alternatives to more traditional mechanisms and deserve to be looked at.
