Savings account with fixed interest or not?

Question

Me and my wife are renting our apartment and we're both students with part time jobs. We are saving up for a condo more suitable to our needs, we would like to have our down payment within five years. It seems a savings account is best since we aren't very tolerant of risk in this position.

We live in Sweden. The central interest rate is negative so savings accounts give almost no return and the stock market is at an all time high, with housing prices at about 300% of the market ten years ago, and still rising. The inflation for june was -0.4%.

Most high profile analysts here believe that the stock market is inflated because people don't want to place their money were it doesn't give any return and that this will bolster the central bank to raise the interest rate any time soon, especially coupled with alarming housing prices and public debt (for complicated reasons, we build about a quarter of the homes we need to meet demand each year in Sweden), but the really bad inflation means that I can't rule out a lowering of the interest rates.

Given this information, should I put my money in a fixed interest account where they're locked away from me for three years and give me about 1.5% in return each year or should I place them in a normal account and ride on the rising interest rates that might happen?

Answer 1

Personally I would have a hard time "locking up" the money for that very little return. I would probably rather earn no interest in favor of the liquidity.

However, you should find out what the early removal penalties are. If those are minimal and you are very confident that you will not need the money over the term period then its definitely better to earn something rather than nothing.

If inflation is negative you aren't out as much not getting any interest as you would be normally.

Consider that in 2014 US inflation was 0.8%. Online liquid savings accounts pay about 1%. so that's only .2% positive. In comparison at -.4% you are better off with no interest than a US person putting their money in a paying savings account. Keep in mind though that inflation can change month to month so just because June was negative doesn't mean the year will be that way.

Not sure your ability to invest in the US market or what stable dividend payers may exist in Sweden....

You said you are risk averse, but it may be worth it to find a stable dividend paying fund. I like one called PFF, it pays a monthly dividend of 6% and over 5 years stock price is very stable. Of course this is quite a significant jump in risk because you can lose money if markets tank (PFF is down over 10 years quite a bit). Maybe splitting up the money and diversifying?

Answer 2

As observed above, 1.5% for 3 years is not attractive, and since due to the risk profile the stock market also needs to be excluded, there seems about 2 primary ways, viz: fixed income bonds and commodity(e,g, gold). However, since local bonds (gilt or corporate) are sensitive and follow the central bank interest rates, you could look out investing in overseas bonds (usually through a overseas gilt based mutual fund). I am specifically mentioning gilt here as they are government backed (of the overseas location) and have very low risk.

Best would be to scout out for strong fund houses that have mutual funds that invest in overseas gilts, preferably of the emerging markets (as the interest is higher). The good fund houses manage the currency volatility and can generate decent returns at fairly low risk.