Most of the private savings are deposited in saving with variable interest accounts. These accounts are also referred to be demand deposits. The typical characteristics of this account type is that money can be deposited as well as withdrawn at any time without paying any charges. This feature renders this account to be similar to that of money market account. However, the point of difference between the two is the interest rate. In Europe, interest rate charged on savings account might vary greatly as compared to that of money market rate. Even under such a situation, the depositors do not withdraw all their money immediately from their savings account when the interest rates on other alternative investments become higher. Whatever may be the reason of such a behavior (transaction costs, market imperfections or any other reason, the characteristics of saving with variable interest account mean that the value of the amount invested in the account is different from the nominal value of the amount deposited from the issuing bank’s pint of view.
Saving with variable interest
Variable interest rates tend to fluctuate as current market rates change. In other words, it can also be said that these rates might change daily. With this, there are many pros and cons associated as well.
Since the rates are fluctuating frequently, an investor has the opportunity to make more on his money which is invested in the saving with variable interest account. The reason is that a standard bank will change its rate typically once or twice every year. This change in rates are proposed by the financial executives who makes guesses as to what will be the condition of interest rates in the coming few months and the best thing is that they guess low.
In saving with variable interest account, the rate of interest is also directly related to other market indicators as well. This eventually eliminates the space of making guesses for setting interest rates and increases the investors potential to make more money. Moreover, within frequent changes in the rates, the saver can also experience a sudden increase in his investment with a sudden rise in the interest rates.
Similar to this, a sudden loss can also occur to the investor. Although, most of the accounts have protective clauses which tend to protect the principal amount of the saver from being lost, however, it is still possible that the amount might lost and the investor earns nothing at all. The rise in inflation rates will make money lose its value overtime.
The investor is also in a position to predict the growth on their investment over a set time period. In a traditional saving account, calculating the estimated profits which will be made from the money deposited is very simple and easy. On the other side, the adjustable saving with variable interest account bears the characteristics that are more likely to be associated with bonds and stock market. What will be the profit earned cannot be calculated and is based upon guesses only.