Investment account alternatives in Europe: Where to invest your surplus funds

In brief:

• Money in a savings account stays accessible, but it does not always protect against inflation, so over the long term its purchasing power may decrease.

• If you are looking for an alternative to a savings account, you might consider money market funds, flexible investments or other investment solutions that offer a higher potential return.

• The ideal choice depends on your goal: a savings account is suitable for an emergency fund, but for spare funds with a 6 to 24 month horizon it can be worth considering investments as well.

• Liquidity and yield usually go hand in hand with risk: the higher the potential return, the more important it is to assess the possible losses and access conditions.

• For many investors, the most effective solution is to split funds across several options, combining a safety reserve with investments that can help reduce the impact of inflation on savings.

Many people have savings that simply sit in a bank account or savings account. This is convenient and easy to understand, but over the long term a question arises: is this money being used efficiently enough?

If the money will not be needed for everyday spending in the near future, but at the same time there is no desire to lock it up for several years, a savings account alternative that offers a balance between accessibility and potential return becomes relevant.

In this article we will look at the most popular options in Europe, analyse their advantages and risks, and help you understand where to park cash if you want to maintain flexibility while also seeking a higher potential return than traditional bank products offer.

Why does money in a savings account lose value?

A savings account is still one of the most popular forms of saving in Europe. It allows relatively quick access to your money, and deposits up to a certain amount are usually protected by state guarantee schemes.

However, there is one significant challenge: inflation.

Inflation means a general increase in the price level in the economy. If your savings earn, for example, 2 to 3 per cent per year, but prices rise by 3 to 4 per cent over the same period, the purchasing power of your money has effectively decreased.

Example:

• Savings: 10,000 euros.

• Savings account interest: 2 per cent per year.

• Inflation: 4 per cent per year.

Nominally, there will be more money in your account, but with this amount you will be able to buy fewer goods and services than before.

This is precisely why many investors are interested in an alternative to a savings account that would allow greater flexibility than long-term investments, while trying to reduce the impact of inflation on their capital.

Where to park cash? A comparison of the most popular options

If you are looking for where to park cash short term, it is worth comparing several instruments.

Savings account

A savings account provides a low potential return, but offers high liquidity and low risk. It is suitable for building an emergency fund and for everyday savings.

Term deposit

A term deposit offers a low to moderate potential return, but the funds are deposited for a fixed term, so liquidity is low. It is suitable for money that will not be needed for a certain period.

Money market fund

A money market fund provides a low to moderate potential return, relatively high liquidity and low to moderate risk. This is a suitable choice for conservative investors.

Flexible liquid investment

Flexible liquid investments offer a moderate to high potential return while maintaining moderate to high liquidity. The risk level is moderate, so they are suitable for spare funds with a flexible usage plan, and they can be a strong option for anyone seeking a liquid investment with high return.

Term investments

Term investments, such as bonds, loans and other instruments, can provide a moderate to high potential return, but usually have low to moderate liquidity and a moderate risk level. They are suitable for money with a clearly defined investment horizon.

It is important to remember that a higher potential return usually also means a higher risk. It is not possible to achieve maximum liquidity, high yield and zero risk all at once, so the choice of the most suitable solution always depends on your financial goals and risk tolerance.

Savings account and deposit: When are they still a good choice?

Despite the limited yield, savings accounts and term deposits remain an important part of financial planning.

They will be suitable for:

• An emergency fund.

• Unexpected expenses.

• Funds that may be needed in the coming months.

• Very conservative capital storage.

Financial experts traditionally recommend first building a safety cushion of 3 to 6 months' worth of expenses, and a quickly accessible savings account would be a very suitable storage option for that.

But once an emergency fund has been created, the next question arises: what to do with spare cash that sits in the account for longer and goes unused?

Money market funds: An intermediate step between saving and investing

In recent years, money market funds (MMFs) have gained popularity in Europe. These are investment funds that invest in relatively safe, short-term financial instruments, such as:

• Treasury bills.

• Bank deposits.

• Commercial paper.

• Other high-quality short-term securities.

After the European Central Bank raised interest rates, money market funds began offering approximately 2 to 4 per cent annual returns while maintaining high liquidity. Many investors use them as a place to put spare funds while waiting for other investment opportunities.

The main advantages of money market funds

• Relatively high liquidity.

• Lower price volatility compared with equity funds.

• Potentially higher returns than a traditional savings account.

However, it should be remembered that these funds are not bank deposits. Their value can fluctuate, and they are not covered by deposit guarantee schemes.

Flexible investing: A compromise between accessibility and return

Many investors look for a solution that would help overcome the classic dilemma: keep money in an account and receive a low return, or invest for the long term and lose access to the funds.

A possible middle-ground solution could be a savings account alternative that combines a worthwhile investment opportunity with relatively high flexibility. For example, investment platforms offer solutions where the investor can:

• Start with a small amount.

• Track investment results online.

• Set an investment horizon that suits them — that is, the period over which they plan to hold the investment.

• Use more flexible withdrawal mechanisms than traditional term investments.

This approach can be of interest to those looking for a liquid investment with high return, while understanding that a potentially higher return is always associated with risk.

Where to park cash short term, 6 to 24 months?

This is one of the most frequently asked questions in personal finance. Let us assume that:

• You are planning to buy a home in a year.

• You are preparing for a major renovation.

• You want to retain the ability to use the funds in the near future.

In such a situation, investing in, for example, the stock market may not be the optimal choice, as market fluctuations can be very significant in the short term. On the other hand, keeping all your capital in a current account can mean a very low return.

Taking both of these considerations into account, a combined approach might be most suitable for your situation:

• Part of the funds in a savings account.

• Part in money market instruments.

• Part in flexible investments with a potentially higher return.

This diversification will help you:

• Maintain access to part of the money at any time.

• Reduce risk, as the funds are not concentrated in one place.

• Increase the potential return by using instruments with different yields.

• Protect against inflation, as part of the capital works more actively.

This is a balanced solution for people who do not want to lock up all their capital, but also do not want it to sit in an account and lose value.

High yield savings accounts in Europe: Do they solve the problem?

Internet searches often also mention high yield, or high interest, savings accounts in Europe.

Such products are available, and their conditions depend on the specific country and the deposit period. Interest rates are usually closely linked to central banks' monetary policy and the market situation.

Although it is sometimes possible to find relatively attractive savings account rates, over the long term they are rarely able to compete with other, higher-yielding investment options.

That is why investors increasingly look not only at the interest rate, but also at the real return after inflation, access to the money, the investment risk and the investment horizon.

Which option is right for you?

If you are building an emergency fund

Then your priority is not maximising profit, but the availability of money, and the most suitable options will be:

• A current account.

• A savings account.

• A short-term deposit.

If you have spare cash

If the money will most likely not be needed in the coming months, but you want to maintain flexibility, you can consider:

• Money market funds.

• Flexible investments.

• Diversified income-generating instruments.

If a balance between liquidity and potential return is important to you, we can recommend taking a closer look at TWINO FLEXI, our investment product, which, in accordance with the product terms, offers a fixed 6 per cent annual return while keeping your money accessible at any time it is needed. The return depends on the product terms, and past results do not guarantee future returns.

If your investment horizon exceeds several years

In this case, it is advisable to consider:

• Bonds.

• Longer-term investment products.

• Equity ETF funds.

• Other capital market instruments.

A longer time horizon usually makes it possible to afford to withstand greater fluctuations in exchange for a potentially higher return.

A higher yield comes with greater risk

When looking for an alternative to a savings account, it is important to understand that no investment is entirely without risk. Liquid investments with a higher potential return may be exposed to:

• Borrower insolvency risk.

• Market risk.

• Interest rate risk.

• Liquidity restrictions under certain conditions.

Unlike bank deposits, many investment products are not covered by deposit guarantee schemes. The investor may lose part or all of the invested capital.

Therefore, before investing, it is always necessary to:

• Assess your risk tolerance.

• Understand the operating principle of the investment.

• Familiarise yourself with the product terms.

• Diversify your investments.

The higher the potential return, the more important risk management becomes.

Conclusion: How to find a balance between liquidity and yield?

There is no single universal answer to the question of where to park cash. The right choice depends on your goals, the term and your attitude to risk.

However, for most people it would be useful to split funds across several categories:

• An emergency fund in a quickly accessible account.

• Part of the funds in conservative investments.

• Part of the capital in flexible investments with a higher potential return.

This is precisely the approach that helps make more efficient use of spare funds without losing full access to the money.

Frequently Asked Questions

What is a savings account alternative?

A savings account alternative is any financial instrument that can offer a higher potential return than a traditional savings account, while maintaining a certain degree of fund availability. These can be money market funds, flexible investments or other investment products.

Where to park cash short term?

If the funds will be needed within 6 to 24 months, a combination of a savings account, money market funds and flexible investments is often used. The specific choice depends on the required liquidity and risk tolerance.

Are high yield savings accounts in Europe safe?

They usually work like other bank deposit products and are often covered by the relevant country's deposit guarantee scheme. The available interest rates and conditions differ from country to country.

What is liquidity in investments?

Liquidity describes how quickly and easily an investment can be converted into cash without a significant loss of value.

What to do with spare cash?

First, build an emergency fund of 3 to 6 months' worth of expenses. After that, it is advisable to diversify the remaining funds across different types of investments according to your goals, term and risk tolerance.

Are liquid investments with a high return risky?

A higher potential return is always associated with greater risk. Before investing, it is important to familiarise yourself with the product terms and assess the possible losses.

If you want to learn more about flexible investment options, take a look at the TWINO FLEXI product, and explore other platform solutions and educational articles on investing, diversification and risk management.

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This material is for informational purposes and is not individual investment advice.