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Growing your savings

According to the results of a recent survey from Household Money Management, many Maltese citizens admit to worrying about their financial future in light of the challenges presented by the COVID-19 pandemic.

Despite these challenges, the majority of people in Malta exercise good financial habits such as creating a monthly budget and putting aside savings for the future. This is certainly good news, however, over 84% of Maltese savers choose to put their excess money into some kind of savings account and it’s important to be aware of the impact this could have on the ability to grow your savings. 

The impact of low interest rates

Accumulating money in a dedicated savings account remains the first choice for most Maltese citizens. This option allows you to maintain access to your funds whenever you might need them.

Traditionally, this has been a reliable solution for predicting the growth of your savings over time. However, due to the current global economic climate, interest rates have hit record lows in most developed countries. When making a savings plan, it is therefore important to weigh up how the current low interest rate scenario may impact your financial trajectory.

Because the current interest rate for a savings account is practically 0%, you will probably not be generating significant returns from holding your excess cash in a savings account. In addition, the impact of inflation could have a further negative effect on your savings.

How inflation can limit your spending power

Have you ever thought about why your regular grocery bills seem to cost a little more year on year, even if your purchases remain the same?

This is an example of the effect of inflation. It is inevitable in any stable economy, but it can erode purchasing power in the long run if your income does not increase to match it. This is because you would need to pay more than the current price to buy the same thing in the future.

This effect is also true on your accumulated savings. According to the Maltese Government's Financial Capability Portal (GEMMA), 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 thirty years to save for a specific financial goal - such as creating a retirement pot or buying a new property - you need to save much more than what amounts to €5,000 today to ensure that you have enough money to achieve it.

Despite these challenges, the general concept of saving remains an effective and important way to manage money. It's however important for one to explore the different strategies that can be adopted to save, and potentially generate returns that beat inflation hence growing your wealth. 

The value of mutual funds

One of the most effective ways to grow your savings pot is to generate returns on the money you've already saved. In the current economic climate, simply placing your money into a savings account may not be enough, as the combination of inflation and low interest rates will likely cause the value of your hard earned cash to gradually erode over time.

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.

It's important to keep in mind that values and returns of individual stocks and bonds fluctuate and the market itself will experience highs and lows. But when averaged over time, a well-diversified portfolio of long-term investments has the potential to outperform inflation and so deliver real growth on your savings. 

Managing risk

Another benefit to mutual funds is that they spread out any potential investment risk over a range of different asset classes, different holdings and across regions depending on the fund’s objective. This means you are not putting all of your eggs in one basket - if one area of investment underperforms, there is the possibility that another area will perform strongly enough to cover the potential loss.

With all that being said, it is important to remember that there is no such thing as a risk-free investment, and you should still discuss your strategy carefully with an investment professional before proceeding.

Taking the first step

If you are interested in exploring your savings and investment options, including incorporating mutual funds into your long-term investment plan, the first step should be to reach out to our financial planning and wealth management team.

We'll connect you with one of our trusted financial planning advisors, who can work with you to develop a personal investment strategy based on your financial situation, your long-term goals and your appetite for risk. Visit our Financial Planning pages for more information.

This article was written by Konrad Borg Myatt, CEO of HSBC Global Asset Management (Malta) Limited. It first appeared in The Times of Malta on 20 December 2020.

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