Saving

What is saving?

If you put part of your income aside every month and keep it available for use later, you save money. By so doing, you can create financial reserves for the future or save money for a specific purpose, for example to buy a car or to go on holiday. You may have a variety of reasons for saving. The form of saving may also vary considerably.

How to save?

You can save by hiding part of your income under your mattress at home or by putting it into a bank account. If you decide to save with a bank, you can choose from a wide offer of saving products. The basic difference between saving at home and saving with a bank is that banks pay interest on the money saved. This means that a bank will repay you the money you have saved, plus the interest accrued. 

Your savings kept in a bank will be safe. The repayment of your savings will be guaranteed by the Deposit Protection Fund.

What is interest?

Interest is money you receive from a bank in return for the use of your money you keep in that bank for a certain period. The rate of interest is agreed upon contractually between you and the bank.

The bank undertakes to pay you interest if you comply with the terms of the contract (e.g. the period during which you may not withdraw your money from the bank). The terms and conditions under which you are eligible to receive interest on your money differ considerably among banks. Hence, read your bank's terms and conditions with due care and attention.

Interest is expressed as a percentage rate, i.e. a percentage of the amount saved, by which your savings will be increased after a certain period. The length of this period is stated after the percentage rate. This means that, if an interest rate of 2% per annum is agreed in the contract, the bank will increase your savings by 2% at the end of each year. Banks normally use the Latin abbreviation p.a. (per annum) to express an annual interest rate. So an interest rate of 2% p.a. means an annual interest rate of 2%.

Banks, however, are not obliged to pay interest annually, nor to express the rate of interest in annual terms. Interest may also be defined in your contract as 2% of the amount saved, payable after a period of two years. In this case, your bank will credit interest to your account in the amount of 2% of your savings at the end of the second year. Hence, both the rate of interest offered and the frequency of interest payments should be considered.

Example: 

A bank offers you a time deposit account with a fixed maturity period of two years and an interest rate of 1.5%. Another bank offers you a time deposit account with a fixed maturity period of two years and an interest rate of 1% p.a. 

Which of these offers is more advantageous?

At the first sight, it appears that the first bank offers a higher interest rate. However, this bank will credit interest to your account in an amount of 1.5% of your deposit at the end of the second year. The second bank will pay interest in an amount of 1% of your deposit at the end of the first year. At the end of the second year, this bank will again credit interest to your account in an amount of 1% of your deposit, plus interest for the first year. Thus, after two years, you will receive interest in the total amount of 2%, which is more than that offered by the first bank. 

What you should know before you enter into an agreement?

Before you decide to sign an agreement with a bank on a saving product, you should answer the following questions:

1.      What part of your income can you afford to put aside?

When you start saving, it is important to know what part of your income you can afford to put aside a month (or at other intervals) for saving purposes. The amount you can put aside depends on a number of factors. The most important are the amount you earn and the amount you spend.

2.      How long can you do without the money you intend to save?

To select the right saving product, it is important to know for how long you can do without the money you intend to keep in a bank. If you save for unexpected expenses, you should not select a saving product from which you cannot withdraw money without a fine for as long as a year. On the other hand, if you know that you will not need a certain part of your savings for two years for example, you should select a time deposit account earning interest at a higher rate.

After answering these questions, you can choose a saving product that satisfies your needs. Banks currently offer the following types of saving products:

Savings accounts

Time deposits

Passbooks

Home saving

What you should pay attention to when selecting a saving product

Before you sign any agreement with a bank, read that agreement over with due care and attention. If anything in the agreement is not clear to you, do not hesitate to ask the bank officer who is to sign that agreement on behalf of the bank.

The most important feature of a saving product is the rate of interest it pays. However, the terms of interest payment should be read very carefully. Some of the saving products (time deposits) have a fixed maturity period. This means that you cannot withdraw your money without a penalty and the bank is not obliged to pay interest if you withdraw any money before the fixed maturity date. On the other hand, there are saving products that are not limited in this respect. 

Certain bank products presented as saving products are not true saving products. Follow the basic rule again: read the agreement over carefully. A typical feature of saving with a bank is that your savings will be repaid to you in full, plus the interest accrued. This means that products where the amount repaid depends on the financial market situation are not saving products and are not protected by the Deposit Protection Fund. Such products are as follows:

  • investment-linked annuities;
  • regular deposits in investment funds;
  • pension saving;
  • investment in gold

Saving for retirement

We may save for a wide variety of purposes. There is, however, a purpose we all need to save for: retirement.

In old age, we are no longer able to earn our living so we need another regular source of income. Such a source is the pension income. Saving for retirement and the payment of pensions after retirement constitutes the pension system. In Slovakia, the pension system consists of the following three pillars:

  • mandatory pension insurance (1st pillar)
  • the old-age pension scheme (2nd pillar)
  • the supplementary pension scheme (3rd pillar)

Although the second and third pillars of the pension system are referred to as saving, they are in fact forms of investment (i.e. pension savings investment). Mandatory pension insurance (first pillar) is organised according to a different principle. The principle is that the social security contributions you currently pay to the Social Insurance Agency are paid out to old-age pensioners as pensions.