The truth about savings accounts: Here’s why you shouldn’t be blindsided by high interest rates

Always take inflation into account

At first glance, one might infer from a more positive interest rate environment that savings accounts are becoming more valuable again, as are interest-bearing securities such as bonds. However, what is forgotten is that not only interest rates but also inflation are increasing. This figure must be subtracted from the nominal interest rate to find the real interest rate.

Inflation is currently 1.4 percent (as of December 2023). If you subtract this 1.4 percent from the 2 percent in the CEA Compte Epargne Plus savings account, you get a real interest rate of 0.6 percent. This is almost the same as the actual result in 2016. At the time, inflation was minus 0.43 percent (called deflation) and there was zero interest on savings accounts at almost all banks. As a result, the real interest rate becomes 0.43 percent. This is not far from the best real interest rate you can currently get on a savings account in a bank in Switzerland.

It should be borne in mind that most banks currently pay 1.5 percent rather than almost 2 percent on the savings account, resulting in a real interest rate of 0.1 percent after deducting inflation of 1.4 percent. We should not forget UBS’s 1.6 percent inflation forecast for 2024. If you calculate this, the actual result, even before bank account fees are deducted, is a small minus.

You often lose money with your savings account

It is the rule, not the exception, that savings accounts provide almost no real return. This is shown by data from the Swiss National Bank (SNB) from 1932 to 2019: Anyone who put around 100 francs into a savings account in 1933 would have around 820 francs today, corresponding to a nominal return of 2.4 percent income.

So far so good, but all these years inflation has been almost the same as the nominal interest on the savings account. This results in a real return of just 0.07 percent. Even bank fees for 90 years have not been cut! In fact, you’ve probably actually lost money in your savings account all these years.

put money to work

This puts a big question mark behind one of the most famous advertising slogans for banks and savings accounts: “Let your money work for you. “After all, you work for your money.” It was written by the now famous Swiss author Martin Suter. As a young man (early 20s) he worked as an advertising copywriter. He described this advertising slogan as his best and at the same time his worst.

At the time, this ad copy angered the Swiss writer Max Frisch so much that he even mentioned it in his diary. He quotes this as the remark of a cynical banker. This embarrassed Suter, as he later admitted.

Frisch found this remark sarcastic because no one allowed money to work for them, but after all, it was always people who worked. The ad copy is also actually wrong because mathematically you can never actually make a profit when you deposit money into your savings account as explained above.

It is also interesting that Suter wrote this quote for the Swiss Volksbank. In the 1980s it was the fourth largest bank in Switzerland. It got into such trouble during the real estate crisis of the early 1990s that it had to be rescued by taking over from Schweizerische Kreditanstalt (SKA). Thus, it became part of SKA, which would later become Credit Suisse and should be rescued by a takeover by UBS in the spring of 2023.

In conclusion, these three points are important:

• If UBS got into trouble, it would no longer have a Swiss bank to save by taking over. A risk for Switzerland, which I analyzed in some texts and videos for Handelszeitung.

• Despite higher nominal interest rates, stocks remain the best option for long-term savings; Of course, if you diversify widely and follow a few rules.

• Interest-bearing securities and bonds still serve essentially the same function for private investors as they did in the era of negative interest rates: Bonds with high credit ratings can have a stabilizing effect on a portfolio. This helps those who cannot cope with price fluctuations very well. If you experience big losses in stocks from time to time, you may not be able to sleep so comfortably. Then you should have more bonds in your portfolio. You can find out how high the proportion of bonds in your portfolio should be using various methods, for example, simple calculations or a survey.