What are savings accounts

Investing is done with the purpose of obtaining higher returns, but like everything, investing comes with risks.

To start investing, firstly we must define the objectives we want to obtain and comprehend what kind of investors we are. To do so we must take into account:

  • The types of financial assets
  • Risk/reward ratios

Savings accounts, what exactly are they?

The safest and simplest product, but with the lowest reward.

To simply put it, a savings account is somewhat of a loan we make to the bank, but with certain conditions. The most crucial ones being, deposit’s term and the yield we’ll be receiving according to the pre-determined term. These factors and conditions are all pre-determined and all vary from bank to bank.

Advantages

The two main advantages of a savings account are without any doubt, the guaranteed capital and the certainty of the amount we’ll be receiving. The bank where the deposit is made usually guarantees full reimbursement of the investment.

In terms of rates of return, the depositor has the options of two rates: a fixed one, where the rate is known and fixed from the start, or a variable one, where the interest rate varies through time.

Another advantage is liquidity, although the conditions depend from bank to bank, the deposit can usually be withdrawn at any moment. But with an early withdrawal, there’s the chance the interest accumulated to date might be completely or partially lost. We still consider this as an advantage due to the fact we can decide these conditions before making the savings account.


Photo by Jason Dent on Unsplash

Disadvantages

One of the biggest disadvantages is the interest rates. Usually, the interest rates are quite low, due to being a very low-risk asset. Unfortunately, under certain conditions this can translate into a very low rate, even lower than inflation rates. Like we explained in a previous article, why invest, this reflects in a diminishment of the real value of our money.

For whom?

We would say this asset is more appropriate for someone who has a very low risk profile. Someone who’s looking to safeguard their capital and not expecting high returns from their capital.

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