The choice of a saving method depends on the goals you have set, as well as the need to have quick access to your funds when necessary.

 

• Storing funds in Cash

Accumulating cash is a possible option, but it is not advisable. This approach carries significant risks – the money can be stolen, destroyed in a flood, fire, or other disaster, you may forget where you have hidden it, or in the event of an accident, your loved ones might not find it, etc. Money saved in this way does not bring even minimal returns and depreciates over time due to inflation. In addition, spending this money later may involve extra complications – depositing it into a bank and covering fees, as there are limits on cash payments. Payments within the country are made only by transfer or deposit into a payment account when the amount is equal to or exceeds EUR 5,000. Despite this, keeping a small amount of cash is justified, but only to the extent necessary to cover urgent expenses – in case of a serious cataclysm or natural disaster.

 

• Storing Savings and Property in a Safe

Cash can also be stored in a safe – in a public vault, managed by the Central bank, by a commercial bank, or by another company. On the one hand, the benefits of this solution are related to minimising risks – from theft or loss. On the other hand, a safe can also hold other valuables – important documents such as a vehicle registration certificate or a property deed, investments in gold or collectibles, family heirlooms, a spare car key, etc. There are also disadvantages – it is necessary to visit the physical location during working hours, pay annual fees, and so on.

 

• Accumulating Funds in a Deposit Account

There are various ways to store funds in non-cash form through bank accounts. All of them are treated as deposits, which means that the funds in them are guaranteed up to a certain limit. Only banks have the right to publicly attract deposits.

In the European Union, the guaranteed amount is €100,000 for Eurozone countries and the equivalent in national currency for other member states. In Bulgaria, this protection is regulated by the Bank Deposit Guarantee Act, which establishes the Bulgarian Deposit Insurance Fund (BDIF). If the Bulgarian National Bank revokes the licence of a specific bank, depositors receive their funds through the BDIF. Funds for the BDIF are collected annually from all banks. If the funds are insufficient, the BDIF may request advance future contributions from banks, increase the contributions, or take out loans. Thus, every depositor can rest assured that their deposits in a single bank are protected up to EUR 100,000.

There are various banking products for storing funds in non-cash form. In our modern times, due to trends such as digitalisation and low interest rates, the differences between these banking products have become smaller than those in the past. Deposits earn interest – a return, which you receive on your savings. It depends on the interest rate set by the bank and the period during which you keep your funds in the respective deposit. Interest is usually paid at maturity – i.e., at the end of the period previously specified in the contractual agreement.

 

• Types of Savings Products

Some banking products are primarily intended for payments – such as the current account and the basic payment account. Their main function is not to serve as tools for accumulating savings, although this is practically possible. Saving through such a product is recommended only if the money will be used in the immediate future, as the return (if any) on such an account is the lowest possible among the alternatives.

A current account is offered by various payment service providers – banks, payment institutions, and electronic money companies. It is suitable for consumers (individuals) who want to receive income from wages, fees, pensions, or other payments credited to their account. Through this account, payments can also be made, such as paying utility bills or transferring funds to accounts of individuals and legal entities.

A basic payment account is offered only in Bulgarian levs and provides a set of legally defined services within the country’s territory, either free of charge or at reasonable fees. The services associated with a basic payment account include cash deposits and withdrawals, receiving and initiating payments, and transactions carried out via a payment card. Banks are required to offer each of the services provided through a basic payment account if they normally provide them to consumers via other types of payment accounts.

A savings account is a product which is not intended for making payments. With this type of account, the bank accrues and pays interest on the deposited funds, but you cannot initiate payments from it. The funds are not bound by a fixed term – in most cases, withdrawals and additional deposits into these accounts are permitted. Since you can practically instantly transfer funds from your savings to your checking account, the interest rate on the former is only slightly higher. Each bank maintains its own schedule of fees and commissions related to opening, maintaining, closing, and operating payment accounts, which the client should review before opening a savings account. The fee schedule, including any changes in the fees and commissions, is also published on the bank’s website.

While a savings account is essentially an on-demand deposit, a term deposit involves a commitment to hold your funds for a specific fixed period of time – 1, 3, 6, 12, 18, 24, 36 months, etc. Payments cannot be initiated from a deposit account either. Closing it is not as fast and easy as transferring funds from a savings account to a current account, which means it is less liquid than the alternatives. Interest on a standard fixed-term deposit is paid only if the funds are held until maturity. In other cases, such as early withdrawal (before maturity), the interest accrued is minimal. Its yield is higher, but it is often minimal and cannot be compared to the potential profit from investing. Of course, you can withdraw funds from your deposit early, but in this case you will lose some of the interest and you may have to pay additional fees.

A structured deposit is an example of the so-called structured products. With these, the return is linked to the performance of another financial market asset – such as stocks or stock indices. When the principal is guaranteed, it can be equated to a classic deposit. Even if the performance of the underlying asset results in a negative return, depositors will receive the initially saved amount. The investment nature comes from the fact that the potential interest a saver might earn is most often a percentage of the increase in the value of the underlying asset. The structured deposit is a kind of hybrid between a savings and an investment product that preserves security but increases potential profit. Its downsides include typically longer investment periods and higher fees for early withdrawal of funds. At the same time, if the price of the underlying asset drops, you will not lose money, but you might miss out on potential returns from other savings or investment products. If the principal is only partially or conditionally guaranteed, the product is considered an investment, not a deposit (savings).

Certain investment opportunities are wrongly advertised as savings plans, but whenever the principal is not guaranteed, they should be regarded as investments, which carry the risk of loss, as they are not guaranteed deposits.

 

TIP: You can combine different forms of savings to take advantage of the benefits of each – for example, a savings account and a structured deposit. This way, you will have fast and easy access to your funds, while also preserving the opportunity to generate higher returns. The right combination depends on each person’s individual preferences for managing their finances.

 

Useful links:

Bank Deposit Guarantee Act