There are more and more warnings from financial professionals that our deposit money is in great danger. We should not be afraid of bank robbery or bankruptcy, but of inflation, which, at low deposit rates, can nullify our real yield. But what is this real return and what can we do to make our investment more worthwhile?
What is Real Yield?
The value of an investment above inflation, that is, the increase in the purchasing power of our committed money over the savings period. For example, if the deterioration in money is greater than the interest paid on our money, then the real yield will be negative. So, if we deposit our money, it is worth less at the end of the term, we can buy less of it. There have already been examples of this, and not long ago around 2010 we were talking about negative real returns.
How much is your money in the bank?
It is clear that in 2010 the increase in the consumer price index was higher than the average yield on bank deposits. After that, deposit rates fell in vain as the central bank began its 24-month interest rate cut cycle, and real interest rates increased as inflation fell.
Now inflation may rise again
According to experts, this may change now. In the future, effects such as utility cuts will run out and consumer prices will rise again. But the SmartPenny Bank is unable to respond to this, as it has recently committed itself to a central bank base rate of 2.1 percent for almost a year and a half.
Deposit rates fluctuate primarily based on the decision of the central bank – of course there are exceptions. Thus, real yields may decline and even disappear. The central bank expects the annual cash outflow to reach the central bank’s target of 3 percent by the end of 2015. According to the MNB, the current average interest rate is 1.89 percent. So if nothing changes, our money lost at the end of this year will be more than 1 percent less than it is now.
What to do?
It’s easiest not to bother with investing and spending everything right away. But if we don’t want to act like the cricket in the tale and would rather set it aside, we need to look for riskier investments than mutual funds or securities.
Another solution may be to turn to extra-government-backed savings. These include home savings , pension insurance, pension funds, pension funds. They are all good constructions if you want to set them aside for the purpose.
Many people believe in inflation-tracking government securities, but unfortunately, they do not really protect against the collapse of money. Although the interest rate of the Premium Hungarian Government Bond is based on inflation, which it thus stably outperforms, the inflation value we calculate here comes from the data of the previous period. Now, for example, a low value will come out this way, but at the expiration date we expect higher impairment.