According to the results of the fourth pulse survey on household money management during the COVID-19 pandemic, as published by the Maltese government’s financial capability portal Ġemma, Maltese people generally feel they are in control of their financial situation. This was backed by a staggering 84 per cent of respondents answering in the affirmative, which is positive news.
More than half of the survey’s respondents exhibited other valuable traits in managing their finances, such as planning for monthly expenditure by allocating budgets and maintaining funds to last them more than three months in a worst case scenario.
Around half of the Maltese population tends to worry about their financial future, with 57 per cent of respondents indicating that they have been able to save over the past three months despite the challenges the pandemic has presented us all with.
This is good news. However, it is also a largely accepted fact that the default choice for the Maltese population to save is by accumulating money in their savings accounts. This is true for around 84 per cent of Maltese savers.
Persisting low interest rate scenario
When you save money in your savings account, you secure the funds in a bank’s infrastructure and at the same time leave your savings available for whenever you might need them, with the possibility of earning some interest in return. Around two decades ago, one could diligently plan how much these interest returns would add up to, but nowadays, it is not the case anymore.
We are living in a very low interest rate environment which seems as though it is going to be with us for some time yet. Interest rates are at record lows in most developed countries, essentially at zero in many and even negative in the eurozone. This is predominantly due to central banks having to open the taps of the money supply to support their respective economies. Having said this, low rates mean that governments have access to cheap debt to fund stimulus measures. It is important to weigh up how the low interest rate scenario impacts one’s financial trajectory.
So you might wonder, but how does this directly affect my savings? Part of the answer is that you will not be generating ‘additional returns’ from accumulating your excess cash in a savings account. This is because the current interest rate for a savings account is practically zero per cent. The second part of the answer, which is more often than not overlooked, is the adverse effects that inflation has on your accumulated savings.
Inflation
Have you ever thought about why the general basket of goods from the grocery store costs a little more year on year? That is the effect of inflation.
A portfolio of long-term investments can outperform inflation
Inflation is inevitable in any stable economy but it erodes purchasing power in the long run. This is because you would need to pay more than the current price to buy the same thing in future. This effect is also true on your accumulated savings.
According to Ġemma’s inflation-purchasing-power-calculator, the value of €5,000 today will be around €3,700 in 30 years’ time. This effectively means that if it is going to take you 30 years to save for your goal, you need to save much more than what amounts to €5,000 today in order for you to have enough money or ‘purchasing power’ to achieve that goal. While the general concept of saving is good and commended, there are different ways and means on how you can do this in order to ensure that the money you are saving now will effectively contribute towards your goals in the future.
What can be done in this regard?
One of the best ways to save and grow money is to generate returns on the money you’ve already saved. In the current low interest rate scenario, defaulting to place your money in a savings account effectively means that the value of your hard-earned cash erodes naturally over time and its purchasing power decreases by simply sitting there. Inflation presents significant challenges for investors, especially when this is coupled with a low interest rate scenario. This is where mutual funds come in handy.
Mutual funds are investments managed by professionals offering diversified investment solutions for investors. Mutual funds can also be considered as a ‘basket’ of investments combined into one vehicle. Each basket holds a different number of security types, such as stocks, bonds and cash, comprising a portfolio. Therefore, when an investor invests in a mutual fund, they are instantly diversifying. One must keep in mind that values and returns of individual stocks and bonds fluctuate and the market itself has highs and lows, but when averaged over time, a well-diversified portfolio of long-term investments can outperform inflation.
There is even more good news. This is because diversification as an investment principle can help to protect against losses by spreading the risk out over different asset classes and regions. The overarching principle is that you will be relying on an investment professional to make investment decisions on your behalf to generate interest income on the bond portion and take advantage of capital appreciation on the stocks within a portfolio. Mutual funds are orchestrated in a way to follow an investment objective that determines the risk profile of the fund, which in return can be matched to your own risk profile and investment needs. Your trusted financial planning adviser can work with you to develop an investment strategy based on your financial situation, your long-term goals and your appetite for risk to help achieve growth that beats inflation and creates wealth.
If you are interested in learning more about interest rates and inflation, visit the HSBC Investment Academy on https://www.assetmanagement.hsbc.com.mt/en/individual-investor/investor-resources/investment-academy.
Konrad Borg Myatt, CEO, HSBC Global Asset Management (Malta) Ltd