Finally, interest rates for call money and time deposits are rising again. But savers who stand on the sidelines too long to wait for even better deals could pay an opportunity cost later. A simple arithmetic example shows why it is better to act now than to wait too long.
Why interest rates are rising
In May 2022, the European Central Bank (ECB) signaled an imminent turnaround in interest rates due to high inflation. In July 2022, the key interest rate is to be raised again for the first time in 11 years. But even before that, many banks have already tightened interest rates in recent weeks (see chart below). For savers, such an increase in the key interest rate means the end of negative interest rates and an increase in interest rates for call money and time deposits.
Cumulative interest rate increases per month for fixed-term deposits with maturities from 6 to 60 months. (Source: WeltSparen, as of: June 2022)
Many savers wait too long
Some investors are already in the starting blocks to invest their money profitably, but the decisive step is still a long way off. They are hoping for even better interest rates than are currently available. During this waiting period, however, the money falls victim to inflation, as savers forgo valuable interest, which can already counteract inflation.
To understand why, Katharina Lueth, Chief Client Officer and Managing Director at Raisin, gave an example in an interview with Business Insider:
Suppose you saved EUR 10,000 for a trip around the world that you wanted to take in the summer of 2023. Currently, you could invest the money at an interest rate of 1.4% pa for 12 months and end up getting EUR 140 in interest. However, if one were to wait six months for the next rate hikes by the banks and then invest it for six months at, for example, 2.0% interest pa, the return until the start of the world trip would only be EUR 100.
If, according to this calculation, investors were to allow 6 months to elapse unused, they would have to assume that the interest rate would be 2.8% after a term of 6 months. If not, in absolute terms, they would make less profit after a total of 12 months.
The situation is similar with a term of 6 months. At WeltSparen, savers currently receive fixed-term deposits for 6 months with an interest rate of 1.00%. At EUR 10,000, this would result in a return of EUR 50. However, if you waited 3 months and then invested your money for 3 months, the interest rate would have to be 2.0% to get an equivalent return.
Using these examples, savers can easily find out for themselves that it is not worth waiting for an even better interest rate. You should always keep in mind that money in an overnight or time deposit account can always bring in more than the bills under the pillow or in an interest-free checking account.
The staircase strategy as a worthwhile alternative
The step-by-step strategy offers a flexible option for investors who want to invest their money with a fixed interest rate but are unsure about the exact time at which they will be available. This can save you money in the long run and bridge the wait for even higher interest rates. Using this strategy, savers typically benefit from better returns while still having access to some of the money.
With the staircase strategy, for example, an investment sum of EUR 25,000 is invested at EUR 5,000 each in terms of 1, 2, 3, 4 and 5 years. After just one year, you can invest part of your investment sum again at the then highest interest rate. The following year, the two-year fixed deposit is due and so on. With this step-by-step strategy, you climb to the next highest interest rate level year after year.
Katharina Lueth also says: “Anyone who does not need their money for a year could invest it in a fixed-term deposit account with an even higher interest rate. If you often have short-term expenses, the call money account is the best option”. Investors at WeltSparen currently receive interest of up to 0.25% pa on their call money.
Future prospects for investors
According to the announcement by the ECB, savers can expect further interest rate hikes from the central bank from September. These should range between 0.25% and 0.50%. Waiting until then and leaving the money with no interest is a strategy that doesn’t pay off. As calculated above, interest rates would have to multiply within a very short period of time and that is uncertain. But even if this scenario should occur, it is still worthwhile to benefit from the current overnight interest rates until then. If the interest rates are then increased, the money and any profits made up to that point can be invested at the then highest interest rate. Ultimately, you can achieve an even higher return.
Benefit from attractive interest rates now!