|
|
|
|
|
|
| Basic financial concepts on savings |
| |
|
Saving is a clever action as it shows the ability to plan ahead, anticipating the future and reducing uncertainty. To have savings with the Bank makes it easier to obtain more advantageous terms for other operations, such as mortgage loans, leasing or even a personal loan.
To this end, Banco Espírito Santo offers a number of products and services that help you save:
- BES analyses your needs and preferences as to terms. risk levels, type of products and markets where to apply your savings;
- BES has a wide range of savings products, including:
- retirement plans and capitalization insurance plans;
- deposits (sight, term and savings deposits);
- investment funds (made up of different financial assets such as bonds, shares, real estate assets, sovereign and currency instruments);
- insurance, covering life, personal accidents, house, car, health;
- Structured savings instruments.
BES offers personalized attendance services provided through its branches and BESdirecto channel that help savers and investors to better decide on how to apply his/her savings.
BES employees listen to customers, asking further clarification if needed in order to propose the most adequate financial solutions to the customer risk profile, time horizon and goals.
Notwithstanding, there is an important number of terms and principles which BES thinks its customers should be informed about so that they may understand them well and clearly.
|
Examples:
|
|
|
“Interest is simply the price or value of money. Interest is the amount paid for borrowed money or the amount earned with a financial application. Money borrowed or applied is also known as principal or capital.
Interest is present in most financial transactions enabling the client:
- to ask for a loan, for the purpose of acquiring or financing something for which one does not hold enough money at the time, against an interest paid to the credit institution;
- Apply one's money setting up, for instance, a bank deposit for a specific term, being paid an interest corresponding to the remuneration of the applied capital.
Interest is expressed in currency unit (Euro). Interest rate is the interest expressed as percentage (%) of capital.
in site Banco de Portugal
Simple interest versus Compound interest
“simple interest, i.e. the interest relating to a specific time period corresponds to the capital multiplied by the interest rate during the said period. Simple interest is also defined as "accrued interest".
Example 1
For a capital (C) of €5,000 applied for a year at a nominal interest rate (r) of 5%, accrued interest will be €250.
“Compound interest consists of the capitalization of simple interest. In compound interest, accrued interest for each period is added to the initial capital, constituting a new capital. Interest is therefore capitalized, resulting in interest of interest or growing capital."
in site Banco de Portugal
“Capitalization means therefore the integration of the simple interest into the capital, resulting in a new capital (greater than the initial one), which will also earn interest. Whilst simple interest grows proportionally over time, compound interest grows more than proportionally over time. “
in site Banco de Portugal
Example 2
For an initial capital of €5,000 remunerated at an interest rate of 5% with half-year capitalization, simple interest in the first half year will be of €125 and in the second half-year it will be of €128.13.
By adding the simple interest obtained in the first half year to the initial capital, we will have a capital of €5,125. Thus, simple interest in the second half-year will be:
At the end of the year, interest earned will be of € 253.13 (€125 + €128.13). This amount compares to the €250 interest in case there is no interest capitalization.
Compare this amount to the €250 interest of Example 1 and see what happens in the next example:
Example 3
For an initial capital of €5,000 applied at an annual interest rate (r) of 5%, with interest paid monthly (k=12), the compound interest at the end of the year will be of € 255.81.
We conclude that at the same interest rate, the more frequently interest is paid the larger will be the compound interest obtained at the end of the period. “
in site Banco de Portugal
Share capitalization - practical example
Example 4
Three fictional characters: Andrew, Albert and Alexander, twins, thirty years old, equal skills and equal opportunities, but different attitudes towards savings.
Each of them saves €250 per month over 12 months.
Andrew spends the €3,000 saved on a luxury vacation. He has an unconcerned attitude towards the future.
Albert applies his €3,000 in a term deposit, an application which he considers to be very safe and earns a net income of 3% per year, in average terms. He is conservative and seeks to preserve his financial assets. He renews his term deposit every time, using the interest earned for consumption purposes. In other words, he adds further €3000 every year to his deposit, but does not allow any compound interest to exist as he withdraws the interest earned each year, at maturity.
Alexander also invests his €3,000 in a term deposit that earns him 3% net per year, in average. He renews his deposit every year but does not withdraw the interest earned which is left there to produce compound interest, i.e. to capitalize.
At the end of 35 years, when they reach 65 and they decide to retire, each sibling will have a pension paid by Social Security which will probably be little more than half their last earned wage. Therefore, the savings set up in the meantime may be very useful...
Let's see what each brother will have:
Andrew has no cumulative savings. He has no chance of enjoying the savings or a life annuity resulting from any cumulative savings. He will face a considerable drop in his living standards.
Albert saved €3,000 each year, having arrived at 65 with cumulative savings of € 105,000. This is undoubtedly a comfortable sum that will partly offset a considerably lower retirement pension than his working pay.
Alexander is the most pragmatic and disciplined of the three. He reinvests the interest earned every year. He enjoys the benefits of the compound interest, and lets his savings capitalize. At 65 he will have €181,386.
Compare the situation of each sibling:
Andrew: €0 in savings
Albert: €105,000 in savings
Alexander: €181,386 in savings.
Who would you like to be?...
Short, medium and long term interest rate
“Interest rates vary in accordance to the term they refer to. Normally, the longer the term of the interest rate the higher its amount. The market establishes prices for practically all terms. There are, however, reference terms that are more important than others.
Interest rates may refer to longer or shorter terms, and they are classified accordingly as short, medium or long term whether they refer to periods equal or less than 1 year, over one year up to 7 years, and over 7 years, respectively.
In general, operations with very short terms have fixed interest rates. Short, medium or long term operations can have a fixed or variable interest rate. In the latter case, the interest rate is revised periodically, with the same frequency of that of the term to which it refers.
In general, borrowers can choose between a fixed or variable rate for their mortgage or personal loans. Banks usually propose variable rates for longer terms.
Euribor are the main short term interest rates and are therefore used as reference interest rates – indexing rates – in variable rate loans. Interest rate swap rates are the main rates used as reference to determine fixed interest rates applied to medium/long term operations.”
in site Banco de Portugal
Fixed and variable interest rates
“Variable interest rates follow the evolution of respective indexing rate throughout the life of the loan. They are revised on the same basis as their respective indexing rate.
The Euribor is the indexing rate used for variable rate loans, particularly in mortgage loans. For instance, a loan at the 6-month Euribor has its interest rate revised every 6 months. The Euribor terms mostly used are: 3, 6 and 12 months.
Fixed interest rates are, as the name says, fixed throughout the agreed term. This term may coincide with the full term for the repayment of the loan or with partial periods of such term (such as, 2, t or 10 years). In general, banks determine their fixed rates based on the swap interest rate.
The swap interest rate is a medium/long term rate for different terms, therefore, it has a different value for each reference terms, namely 1 year to 10, 12, 15, 20, 25 and 30 years. This is the reference fixed interest rate in the interbank market. ISDA (International Swaps and Derivatives Association) as well as specialised electronic information platforms release the value of major swap rates on a daily basis, throughout the day.”
in site Banco de Portugal
Nominal, effective and real interest rate
“The nominal interest rate is the interest rate that must be specified in every loan and financial contract and corresponds to a period of 1 year. It is normally identified as nominal annual interest rate (NAR).
Whenever interest is paid in periods of less than one year and it is added to the principal (compound interest), the effective rate (ER) is higher than the nominal rate.
The effective rate (ER) depends on the nominal annual interest rate (r) of the term expressed in proportion to the year (n) and the periodicity of the interest payment (k):
The effective rate (ER) corrected of the inflation rate for the period gives rise to the real interest rate (RR), which is provided by:
in site Banco de Portugal
Gross and net interest rates
“The nominal annual interest rate (NAR) is an annual interest rate presented generally, in gross terms (GNAR), as it includes taxes on the financial applications.
The net nominal rate (NNR) is the nominal rate net of income tax (21.5% unless subject to a special tax) withheld by the credit institution, which means that the GNAR is higher than the NNR.”
in site Banco de Portugal
Example 5
A gross nominal annual rate of 4% on a term deposit corresponds to a net annual rate of 3.14%.
There are three main types of deposits:
- Sight deposit, whereby money can be withdrawn without penalty at any time;
- term deposit, whereby money is applied for a specific period and may be withdrawn before the date specified subject to a penalty on contracted interest. In this case, the client can withdraw or transfer his/her money, however the interest rate that he/she will earn will be lower than that contracted for the whole term. Normally, the amount, term and interest rate of a term deposit are agreed between the customer and the bank at the beginning of the contract;
- savings deposit is a special type of deposit which combines more attractive interest rates than sight deposits but can be increased at any time (in this regard they are similar to sight deposits whereby the amount applied may be changed by the client at any time). It is particularly useful for anyone looking for a treasury management of his/her sight deposit, as it combines flexibility with attractive remuneration.
Clients' deposits are guaranteed by the Deposit Guarantee Fund, up to €100,000 per depositor.
“The Deposit Guarantee Fund was set up by the General Law on Credit Institutions and Financial Companies approved by Decree-law 298/92 of 31 December. The Fund is a corporation governed by public law, with administrative and financial independence, with head-office in Lisbon, operating with the Bank of Portugal.
Its main mission is to guarantee the reimbursement of the global amount of the cash balances of any depositor, according to certain conditions, namely up to the maximum amount of €100,000 and in case the deposits with the respective credit institution become unavailable (in case of bankruptcy)."
in site Fundo de Garantia de Depósitos
in site Fundo de Garantia de Depósitos
“The main indexing rate of the Eurosystem is the Euribor (European Interbank Offered Rate), the reference rate of the interbank money market. Euribor rates differ according to respective term: 1, 2 and 3 weeks, 1 month up to 12 months.
The Euribor rate is determined daily at 11 a.m. (CET), resulting from the average quotes provided by a panel of major European banks.
Euribor is the indexing rate used in variable-rate mortgages.
In site Banco de Portugal
|
|
|