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Find out whether you are a smart saver - do the test!

Are you a smart saver?

Saving is like sports or hobbies : it can be fun and stimulating, but you have to “get into it” and understand a few fundamentals to really enjoy it to the fullest extent. Do you master the basic savings techniques? Or do you mix up “interest rate” with “capitalisation” and “yield”? Do the test below, and find out how smart a saver you really are.

1. Amongst the following options, which is the most efficient savings strategy?

a. Create a pot for emergencies and deposit money in that pot as regularly as possible

b. Pay off any outstanding high interest rate consumer loans as quickly as possible

c. Request your employer to directly deposit a portion of your salary in a interest rate paying savings account

d. All of the above

2. Among the following banks, which one(s) typically offer the highest interest rates on their savings accounts (as calculated over a full year)?

a. A traditional high street bank, in which the majority of the population has his or her current account

b. An online bank

c. A captive bank, typically owned by a car company or a retail distribution company

d. The subsidiary of a foreign bank

3. The Guarantee deposit scheme is actioned when a bank defaults. This public entity indemnifies all depositors within 7 working days for up to:

a. EUR 50 000 per bank, per client

b. EUR 75 000 per bank, per client

c. EUR 100 000 per bank, per client

d. EUR 150 000 per bank, per client

4. Numerous financial experts and banks recommend that clients constitute “precautionary savings”, to be able to face an unexpected blow or setback. As a general rule, these savings ought to be able to allow you to settle expenses for a period of:

a. 1 month

b. 1 to 2 months

c. 3 to 6 months

d. at least 1 year

5. A term account typically offers a higher yield than an instant savings account

a. True

b. False

6. The calculation of compound or capitalised interest is done on the basis of:

a. The initial sum (the principal amount) and accumulated interest

b. Only on the initial sum (the principal amount)

7. Which of the following frequency of interest payment will maximise overall interest received, assuming the interest is compounded?

a. Annual interest payments

b. Semi-annual interest payments

c. Quarterly interest payments

d. Monthly interest payments

8. When I purchase a bond, I am certain to recuperate my initially invested capital at maturity.

a. True

b. False

9. I have EUR 10 000 to invest. A first bank offers EUR 80 as a cash welcome bonus. A second bank does not offer any cash bonus, but pays an annual interest of 0.9%.

a. I should deposit my money in the first bank

b. I should deposit my money in the second bank

10. Which of the following recommendations would you make to someone who is considering buying his/her first home?

a. Start by eliminating your outstanding consumer credit, before asking for a mortgage

b. Set a specific goal and a specific debt ceiling to not exceed

c. Build a budget to help calculate the monthly mortgage interest payments you can afford

d. All of the above

Answers

1. (d) all of the above

All of the suggestions are very sensible. Starting with automatic, regular transfers to your savings account can be a very powerful way to kickstart your savings efforts. It is a fairly painless way to boost your savings. Don’t forget to review the amount you put aside every month from time to time, just to see whether you can’t increase it little by little, to accelerate the growth rate of your savings.

2. (c) a captive bank

The yield offered on savings accounts vary from one bank to another, and can be adjusted by the bank at any time. Online banks regularly offer welcome bonuses or other monetary incentives such as eye-catching interest rates for a limited number of months, after which the interest rate will drop quite dramatically. These offers are designed to convince you to open up an account with the online bank. Once done, the goal for the online bank will be to sell you a number of other financial products and services. If your goal is to put your cash holdings to work for a relatively short period of time, opening up an online bank account can be the best option. However, if your goal is to put money aside for a longer period of time, the captive banks often are the more attractive alternative, as they structurally need to attract retail deposits, and will therefore be inclined to pay interest on these deposits over time, and not just for a few months.

3. (c) EUR 100 000

Created in 1999 in the French law for savings and financial security, the Deposit Guarantee scheme is actioned when a bank defaults. It is designed to indemnify the depositors within 7 working days, up to EUR 100,000 per person and by bank, if that establishment cannot face its obligations any longer.

4. (c) 3 to 6 months

A minimum of 3 to 6 months is generally recommended. If you can save more than that, so much the better, but then you should ask yourself whether these additional savings ought to be invested in longer term, less liquid but possibly higher yielding assets.

5. (a) True

A term deposit typically offers a higher yield than a savings account, because the bank pays you for your willingness to immobilize your cash. Consequently, the longer the term of the term deposit (typically ranging from 3 months to 5 years), the higher the interest rate received on the deposit. Less well remunerated, the savings account offers clients the flexibility to access their cash, at any time, without penalties.

6. (a) The initial sum (the principal amount) and accumulated interest

Compound interest is due on the initially invested sum of money - often called the principal amount - and on subsequently earned interest. As a result, when compounding interest, the investor will receive interest on interest. To designate interest received on the initial sum of money only, the term “simple interest” is used.

7. (d) Monthly interest

The higher the frequency of the calculation and the distribution of interest, the higher the compound interest (as you can put your interest to work sooner). Receiving interest on a monthly basis is therefore financially more attractive than quarterly distributions, receiving income quarterly is better than being paid semi-annually etc.

8. (b) False

A bond is a form in which a company or any other issuer can raise debt, and it is therefore a form of debt. The price of a bond can vary during the course of its life, as a function of the evolution of interest rates and/or the financial health of the borrowing entity. At its term (at maturity), the borrower owes the amount initially borrowed from the creditors, the bondholders. You are therefore exposed to the risk that he cannot do so (in which case we describe the borrower as having defaulted on his debt). Now in the case of a French government bond (also known as Obligations Assimilables du Trésor or OATs) this risk of non-reimbursement is extremely low, but if the bond in question was issued by a company or an emerging market country, this risk increases.

9. (b) I should deposit my money in the second bank

Welcome bonus commercial offers can appear as being very attractive. And for those who only have modest sums of money to put aside, the bonus can represent a meaningful percentage of the saved amount (but regrettably the bonus can only be obtained if a minimal amount of money is transferred to the newly created account). It is therefore important to compare apples with apples. And in our questionnaire, the offered EUR 80 bonus represents only 0.8% of the deposited amount, which is a lower yield than the 0.9% offered by the second bank.

10. (d) All of the above

Generally, lenders recommend that your overall debt (inclusive of consumer loans, car loans etc.) does not exceed 30% of your gross income. Any efforts you can undertake to reduce your outstanding debt will help in negotiating the best terms on your mortgage. Before starting these, the construction of a detailed budget will help you to assess the level and nature of your expenses. This in turn should allow you to identify those expenses which you could potentially reduce, which, in turn, should enable you to put more aside to reach your objective in terms of required upfront capital for the purchase of your house.

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