Saving money explained
The financial system can help people, families and businesses in their work and life. It can help you manage, protect and build on your money, and it can give you resources to undertake projects or cope with unexpected needs. But all this is only possible if you know the opportunities the system provides, its rules and also its risks. These information “fact-sheets” can help you study some of these aspects in greater detail and find out more about the financial system, banks and financial products and services.
What are savings and what are they for?
Each of us has income, Your income usually comes from your salary or wage, or from a business you run. Or it might simply be money that people send or lend to you. You also have expenses that arise from day-to-day life. But you don’t always spend everything you earn. Any amount of money, small or large, that you don’t spend right away, and that is left over after your expenses, is your savings. In economics, savings are defined as the difference between income (revenue) and consumption (expenses).
Savings can be used for different things. First, if you add them up month after month, they create an asset: a reserve of money that builds up gradually over time.
This reserve can be useful if you have to cope with unexpected expenditure, or future costs (for example medical treatment or your children’s education). Savings can also be useful if you have to go through a period when you have no income or when your expenses are higher than your income. Or you could use your savings to make a major purchase like a house, furniture or a car.
It isn’t always possible to put money aside in savings. Sometimes your expenses are too high, so in some months you manage to save more, and other months you save less. You need to look at your savings over time. Because small sums of money can gradually build up to fairly large amounts of money.
Saving has two important advantages:
- it allows you to reduce your financial vulnerability (the possibility that you might have to ask for a loan if your expenses are even just a little bit higher than your income, or if an unexpected event, such as illness, means that you have to cope with higher costs);
- it gives you access to other financial instruments and services such as credit (a loan). For example, a bank that sees you building up savings fairly regularly will be more willing to give you credit.
If you choose your financial instruments carefully, they can help you accumulate, increase and above all protect your savings. They can also make it easier and quicker for you to become socially and economically integrated.
What are banks, and what do they do?
It’s quite common for people to find that they have more money at their disposal than they need for their immediate expenses.
It’s also quite common to find that at a certain time, or for a certain project (a business initiative, say, or buying a house) you need to borrow money. You then pay this money back over time. A bank is the place where the money that some people pay in – in the form of savings – is use to help people who don’t have enough money for their projects.
Without banks, each time you needed money you’d need to look for someone willing to lend you the amount you needed, for the length of time you needed it for. Just imagine this situation being multiplied for each person or shop or factory…
So we can say that banks are intermediaries – between the people who pay their money into banks, in the form of deposits, and the people who take that money out (in the form of credit, or loans).
But banks do much more than that. Imagine a situation where the person who borrowed the money is not able to pay it back. In such cases, the bank still guarantees that the person who paid their money in as a deposit will be able to take their money back out at any time.
The bank has a very delicate function. On the one hand, it has to protect everyone’s savings. And on the other hand, it has to provide credit – the possibility of lending money to people who need it. A country’s entire economy is based on this intermediation function.
The bank’s ability to lend money to people, for personal or business projects, who will be able to repay their loan is the main skill of a good bank. If the bank lends money too easily, there is a risk that it could fail. But if it is too cautious and doesn’t lend enough, it damages the entire economy and, in the end, itself too. That’s why Italy has an organisation, the Bank of Italy, that oversees the activity of each bank, to protect everyone.
The bank also has another very important function. It makes all the payments that take place every day in any economic system both easy and quick. Imagine what would happen if each of us had to make all our payments in person and in cash, or what that would mean for businesses. Using systems that are getting quicker and more efficient all the time, banks manage all out payments:
- debit and credit cards;
- bank transfers;
- automatic debits and credits on our accounts;
- money transfers.
At the same time, the bank ensures that cash (in the form of bank notes) is available at any time to the public.
Why should I open a bank account?
Bank accounts – current accounts – have many functions and are necessary for many aspects of everyday life. Sometimes you need to have a bank account before you can get a job.
First of all, a bank account is a safe place to deposit your money. That means you don’t have to hide it at home, with the risk that it could be stolen, or you’ll lose it. As we saw when we were speaking about savings, a current account, like other savings products, allows you to accumulate money over time. So you can build up a useful reserve for the future. A current account pays you a small amount of interest (the interest rate depends on the decisions made by the bank and the rates available on the market). This interest is added to your savings.
A current account allows you to use all the payment services that the banks offer and which make your everyday payments much simpler and quicker. These services include:
- credit cards (see the “Credit card” fact-sheet in this section);
- top-up cards that allow you to withdraw or spend money wherever the machine is available (in shops, for example);
- bank transfers;
- the possibility to automatically credit (pay in) your salary or wage;
- the possibility to automatically debit (pay out) your bills without having to pay them in person each time.
A third and equally important function is that a current account gives you access to other financial services and products. These include insurance and credit (small loans, personal loans, instalment purchases or mortgages).
For a business, small or large, a current account is indispensable.
A current account, even if it has a cost, or you don’t have very much money to pay in to it, gives you important opportunities to manage your money and your present and future financial needs. And it is certainly a vital instrument to help you acquire -economic citizenship-, the possibility to become active citizens in a country’s economy.
What is insurance?
Insurance is a very specific type of financial product. It is a contract that transfers, to the insurance company, the risk that a negative event might happen. Usually the risk that I have an accident and get injured, or that my house is destroyed by fire, or that my car is stolen, is my risk. If any of these things happens, there’s nothing I can do about it.
If you have insurance, the risk of these things happening is transferred to the insurance company. The amount of money you pay to the insurance company is much smaller than the amount you would lose, or the damage you would suffer, if any of these negative events happened.
If somebody steals your car, for example, the insurance company will give you back an amount of money that corresponds to the value of the car when it was stolen. Or, if you’re involved in a car accident, the insurance company of the person who caused the accident will pay any damage that the accident caused to people or things. There are insurance products for lots of different things. You can insure specific objects, you can insure your life. You can insure anything that has an economic value, including remittances, for example. You can also take out insurance in case you ever need serious surgery or expensive medical treatment or specialist medical tests or examinations (health insurance). Other types of insurance are compulsory by law, such as Third Party car and motor-cycle insurance.
The amount you pay to the insurance company is called the premium, The amount that the insurance company gives you if the event you have insured against ever happens is called indemnity or compensation. Before buying an insurance policy it’s important to read each clause in the contract carefully.
You need to pay special attention to all the limits the insurance company applies to the compensation they are willing to pay. In some cases, the insurance company will not accept liability (for example, if you set fire to your own house, the insurance company won’t pay any indemnity or compensation). However, the contract must state these limits clearly.
But why should you spend money today for something that might happen in the future, but might never happen at all?
Insurance companies play a very important role in people’s lives. An unfortunate event, like a robbery, a fire, a flood or an expensive operation or other medical treatment are rare. But when they happen they can cause serious financial difficulties for the people involved. They could even cause you to get into debt. Imagine you need money today to buy a new car because your car has been stolen, but you’re still paying the instalments for the stolen car. Or imagine you need costly repairs to your house. When we speak of insurance we’re always speaking of risk. That is, something that might happen, with a certain – but different – probability that varies from person to person. But the size of the risk varies, depending on the damage it could cause to your or your family. You should never under-estimate risk just because it might not happen. That’s why it’s important to be careful and cautious, and to think about the future and what would happen to you if that risky event ever did happen. The cost of your insurance cover (that is, the premium) is part of the evaluation. For example, insuring a 10-year-old car against theft is too expensive compared with the amount of money the insurance company would give you if the car was stolen. It’s important to make sure you get plenty of information before you try to deal with any risk or insurance.
What is a savings product?
Savings products are financial products that allow you to put aside a set amount of money on a regular basis. Over time, you can build up a small capital sum that can be used for future expenditure.
In practice, these instruments allow you to pay in a small amount of money each month (or any other frequency you prefer). This money slowly builds up (along with the interest on the amounts already paid in). After a certain period of time this gives you a fairly substantial sum (which is called capital). You sometimes need to make a purchase (for education, for example, or to buy a car or van for your business) that requires quite a lot of money. It would be difficult to find that amount of money all at once.
One solution is to set aside small sums of money on a regular basis. After a certain amount of time, you will build up the amount of money you need without too much effort.
The British Government, for example, has created a product that enables parents to set money aside, even just small amounts, for their children. When the children are 18 years old they receive all the capital paid in plus any interest. In that way, they can pay for their university studies or start up their own business. To give you an idea, if a parent paid €30 each month until their child was 18, the child would receive nearly €8,000. This of course is just an example, and is an approximate calculation that doesn’t correspond to any specific product.
A number of different savings solutions are available. With some products, you need to pay in a set amount on a regular basis. Others let you pay money in only when you have some available. The interest rates on the money paid in vary.
These products are provided by financial intermediaries (in general banks and insurance companies). Today their terms and conditions are becoming more and more flexible, so that are becoming more accessible to small savers.
It’s a good idea to get as much information as possible on all the terms and conditions and to ask your bank or insurance company for advice on the most suitable product for your needs. This can be an alternative way to set money aside over time before you send it home to your own country to buy a house, say, or make some other important purchase.
And while your money is accumulating, you are also building up a small capital sum that can give you a useful guarantee for the future. It can make it easier for you to get access to other financial products or services, such as credit. In fact, banks assess you on the basis of your income (salary or wages) and your assets.
Financial intermediaries and social responsibility
Financial intermediaries perform an important intermediation role (that is, they provide links between financial services and the public) in a country’s economy. (The fact-sheet “What do banks do” gives you an idea of the role of banks as financial intermediaries). Financial intermediaries collect money (deposits) and lend that money to people and businesses to make purchases or for their business activities.
In doing this job, financial intermediaries make choices based on a number of factors. In recent years, “social responsibility” has become an increasingly important factor in their decisions.
“Corporate social responsibility” is about the way that companies, and in many cases intermediaries, carry out their work. It concerns the relationship between the company and its environment, its employees, and the effects of its choices and decisions on the area where it is located.
The way that intermediaries work – that is, who they decide to lend money to, the money that we’ve deposited with them – is very important. It’s particularly important for your future and the effects their decisions will have on the place you live and work or on your country.
The way financial operators behave can have a very significant influence on a region or country’s business activities. For example, a financial operator’s decisions can encourage research, or local crafts, or the growth of existing businesses.
The financial operator might also decide not to finance a company if it discovers that the company is exploiting its workers, or acting in a way that could harm savers, or is causing pollution. Of course, these are only some examples.
The economic conditions that the financial intermediary offers you (the interest rate it applies or the commission it charges) are not the only thing you need to take into consideration when deciding between one operator or another. You also need to obtain as much information as possible on the way the intermediary acts and makes its decisions.
There are citizens’ associations, companies and research centres that specialise in social responsibility. Their job is to observe the way businesses behave, including financial intermediaries. They put pressure on businesses to ensure that they pay more attention to these social issues in their day-to-day decisions.
The “armed banks” campaign (see the web site www.banchearmate.it, is intended to make banks more aware of the fact that some companies are producing, and exporting, weapons to countries at war. This is just one example of the way savers can monitor their banks.
Learning about banks
This section contains some useful information about banks and their financial services and products.
What is a current account?
A current account is a set of services provided by banks to make it easier and quicker to manage your every-day expenses. It also provides you with a safe place to keep your money. A current account is a contract where the bank agrees to take care of the money you pay in (deposit) and carry out any operations (also called transactions) you instruct them to do. The bank records each operation or transaction (paying in money, expenditure, paying out money, etc). So the bank can tell you at any time the balance of your account (that is, the amount of money available at any given time). The bank has to send you a regular statement, which sets out and summarises all the operations you’ve carried out in that period. That means you can check the transactions listed in the statement and inform the bank in writing if there are any errors. The bank gives you 60 days to inform them. You can also ask for other financial services and products in addition to a current account. The bank will assess on a case-by-case basis whether or not you are eligible for a given service. These additional services include payment cards or credit cards, investment products, insurance and credit (of all kinds). The bank generally pays you interest on the money you pay in to your current account. But it asks you to pay for managing your account, and for the services it provides.
To open a current account you need to have reached majority age (18) and have an identity document and tax code. This is because the account gives you the opportunity to use all the payment services on offer.
Banks offer different kinds of current account, each with different features and costs. Some examples are:
- traditional current accounts;
- current accounts for specific age groups (young people);
- current accounts for specific businesses or groups (for example, accounts for immigrant customers, account for artisans and craft-workers);
- deposit accounts (reserves where you can pay in money. Deposit accounts give you higher interest rates but a smaller number of services);
- multi-channel accounts (online accounts that you can use over the Internet);
- package accounts (current accounts with a number of other services included in the price).
The difference between these different types of account depends on the way the account can be used and the different additional services included. Examples of these additional services are Automatic Teller (ATM) services, direct debits for paying bills, etc).
Choosing a current account – what should I look for?
The first things to consider when you’re deciding which type of current account (c/c) to choose is: what are my needs?So, you might ask:
- what will I be using the account for? (ordinary household expenditure, to invest money, to save, for my business)
- how often do I expect to use the account?
- how much money do I expect to pay in to the account?
- what services will I need?
Each current account is different, and the most important thing is that the account you choose should be suitable for your needs. For example, there’s no point opening an online account if you don’t have easy Internet access. And there’s no point having a credit card if you only use cash to go shopping.
The second thing to consider is the number and type of services a particular current account offers you. For example:
- ATM card;
- payment services;
- other banking service;
- non-banking services (for example insurance, etc).
The third thing to consider is the cost of the current account and the cost of each service or product connected with it. When you evaluate these costs you need to pay attention and ask the bank for precise information. Some costs are fixed costs, connected with the current account or other individual products. Fixed costs are usually annual costs that the bank charges to manage your account and payment services (such as an ATM card). More and more banks are offering packages of all-inclusive products along with current accounts, at a set annual cost. And some costs are variable costs. These depend on the number of transactions you carry out on your current account. Examples of variable costs are commission on each money transfer you carry out or on each withdrawal you make from an ATM belonging to a different bank from your own.
It’s a good idea to ask your bank to explain all these costs in detail. “Stamp duty” is a fixed tax imposed by the state. The bank’s job is simply to transfer this tax from your current account to the state.
The fourth thing to consider when choosing the type of account to open is the interest rate it applies. There are two interest rates:
- the interest rate the bank pays you for the money you deposit (generally very low, except for some current accounts and deposit accounts).
- the interest rate the bank charges if your account goes into the red (that is, if at any time, even just for one day, you spend more money than you actually have in your account). in this case, your account has a negative balance.
You need to consider all of these things, taken together, when making your choice. And you always need to remember two very important steps:
- first of all, have a clear idea of your needs – why you need a current account and what you’ll be using it for.
- and second, ask the bank for full, precise information. The bank has a duty to give you that information and help you choose.
Savings accounts – are they different from current accounts?
A savings account is one of the deposit accounts that banks offer their customers. It’s an instrument you can use to save money. Savings accounts take the form of a special document called a savings passbook (or bankbook) Once the bank issues this passbook, it gives it to the customer. The bank records all the pay-ins (money you pay in to your savings account) and withdrawals (money you take out of your account) in your passbook. Beside each pay-in or withdrawal the bank notes the balance – the amount of money still deposited in the account (and so available to you) at that time. Your passbook is the document that tells you the credit you have with the bank. To deposit or withdraw money you must present your passbook to the bank.
n general, there is no age limit for savings accounts (some are intended specifically for children). There are two types of savings account: a bearer account and a named account.
A bearer account can be used by anybody who actually has the passbook in their possession. The can take the passbook to the bank and withdraw money (so take care of your passbook and make sure it doesn’t get stolen!). A named account is made out to one or more people. They must be present at the bank when the passbook was issued, and only they can use the passbook. The bank is obliged to check that the person using the passbook to withdraw or pay in money really is the holder of the account. If someone else takes the passbook to the bank they cannot use the passbook for any transactions. If by any chance the bank allows them to withdraw money from the account, the bank is responsible.
There are two different types of deposit account passbooks, with different conditions for each. They are the simple passbook and the tied or notice passbook.
A simple passbook pays interest on the money deposited. The bank can vary the interest rate at any time, and the account-holder can withdraw money at any time.
With a tied or notice passbook, the money paid in is tied for a certain period of time (for example 6 months, a year, or 18 months). This means that for the specified length of time you cannot withdraw money from your account. You can, however, pay money in. In exchange for this restriction on your account, the bank gives you a higher rate of interest and undertakes not to change that rate for the period specified.
There are important differences between a current account and a savings account. First of all, a savings account is a document that you keep with you, at home (which means it could be stolen). A current account isn’t an actual physical document, so is more secure. Second, a deposit account allows you to accumulate money, but you can’t use it to make payments (bank transfers, ATM cards, and so on). So each time you need cash you need to go to the bank (during its opening hours), queue up and make a cash withdrawal. With a current account, you can instruct the bank to carry out payment transactions using various methods (payment cards, money transfers, etc). At the same time, a deposit account gives you a higher interest rate than a current account. And with a tied account the rate is fixed for a certain period of time. In addition, the bank usually doesn’t charge you anything for a deposit account. Or, if there is a charge, the cost is very low. However, if you want to obtain a mortgage or loan, then you need to have a current account.
A deposit account is much easier to obtain than a current account. (Remember, to open a current account you need to have reached majority age (18) and have an identity document and tax code. This is because the account gives you the opportunity to use all the payment services available).
It’s clear, therefore, that the two types of account – current account and deposit account – have very different functions. Let’s say you want to accumulate money for a certain period of time and you know that you won’t need the money right now. In that case, a savings account could be a good option (it gives you a higher rate of interest). But if you need the money for your day-to-day expenditure or you need other bank services (a loan, for example), then you need to have a current account. Of course, it’s also possible to have both types of account to manage your money efficiently. You can put some money aside on your savings account, and pay the amount that you need on a day-to-day basis in to your current account.
Payment cards get their name from the fact that they allow you to pay your expenses without using cash. To do this you use special point-of-sale (POS) terminals that are now widely used. Payment cards also let you withdraw money from automatic teller machines (ATM) all over Italy. And from November 2009 this service will be available in all the countries of the European Union. Payment cards also give you access to a growing number of services. These include checking your current account balance, recharging your mobile phone or making certain payments (utility bills, etc).
Payment cards can be issued by banks (or BancoPosta, at the Post Office). They usually require you to have a current account where the various transactions you carry out are debited. However, for some prepaid cards you don’t need a current account. For security reasons, to use a payment card you must have a personal identification number (PIN). The bank will give you this along with your card. Paycards have daily and monthly limits (ceilings) that set the maximum amount you can spend or withdraw using that card. The amount of this limit depends on the Anti-money-laundering rules (see the fact-sheet on the “Anti-Money-Laundering Law” in this section) and on your contract with the bank. There are three types of payment card:
Debit cards are the most widely used type of payment card. They let you withdraw money, make payments, recharge your mobile phone, pay bills etc. You can use the card at automatic teller machines (ATM) or point-of-sale (POS) terminals in shops, restaurants etc. To use the card you need to insert your personal identification number (PIN). All the operations you carry out using your card are debited to your current account immediately. So you need to make sure you don’t withdraw or spend more than you have available on your account! Debit cards have daily and monthly limits. There’s no charge to use them to pay for purchases (using a POS). It’s also free to use them to withdraw money from an ATM belonging to your own bank (not necessarily your own branch). But if you use another’s bank’s ATM, there may be a commission to pay. This should be set out in the conditions included in your debit card contract. Many banks give you an ATM card when you open a current account, with no additional costs. In other cases, you pay a set annual fee.
Prepaid cards, which are sometimes called “rechargeable” cards, have the same functions as debit cards. However, there’s an important difference. Operations using debit cards are charged directly to your current account. But with prepaid cards, you pay a certain amount of money on to your card in advance, when the card is issued. And that’s the amount that you can spend using that card. You can “recharge” your card by paying more money on to it, just like a rechargeable mobile phone SIM card. A prepaid card is a sort of “reserve” that lets you know at any time how much money is left on the card. Prepaid cards can also be issued by shopkeepers or other operators, not just banks. They have precise usage and recharge limits (a limit for each individual recharge and a limit for the total recharges in any given year). Prepaid cards generally have a cost, which you pay when the card is issued. You also have to pay a fixed commission each time the card is recharged. These costs are usually fairly low. Nowadays there are two types of prepaid card:
- disposable cards. These are “anonymous” – that is, they are not made out to any particular user so can be used by anyone. However, they can only hold up to 500 euros and can’t be recharged;
- "named" cards, made out to a specific person. The card-holder must show an identity document when they apply for the card, and they are the only person who is authorised to use it. Named cards are the most common type of prepaid card. They can be recharged over and over again, as long as the total amount paid on to the card in a single year does not exceed the limit set by the issuer. There are also some limits on use, depending on the issuer.
In November 2009 a European Directive on payment services will come into force. So from November, it will be possible to issue three types of card:
- disposable cards for up to 150 euros;
- anonymous” cards that can be recharged several times, but only up to 2,500 euros in a given year;
- “named” cards, with no recharge limit.
Credit cards can be used for all the usual services you would use a payment card for. But they have an additional service. The money you spend is not debited immediately to your account, it’s debited half-way through the following month. So, for a month, the bank or whoever issued the card has, in effect, lent you money free of charge. That’s why they’re called credit cards. It’s also why, before issuing you with a credit card, the bank asks you for certain information (for example, about your job or your income). The bank needs to be sure that you’ll be able to pay back your debt each month. This means that each card, and each customer, has a different spending limit, depending on their income. In general, credit cards have higher annual charges that other types of card.
You can use credit cards all over the world, thanks to an agreement between all banks to create “international payment circuits”. Each circuit takes the name of the company that runs it (VISA, Mastercard, etc). That’s why, when you use a credit card in another country, you don’t need to change money into the currency of that country. Your card company’s payment system exchanges the money automatically from one currency to another, at the official exchange rate for that day.
In some cases, when the time comes the following month to pay for any purchases you’ve made using your card, the payment is by instalments. This type of card is called a revolving card). Of course, you’re charged interest on these instalments. The interest rate should be set out in the contract you receive when your card is issued. It’s a good idea to ask your card issuer for full information on the terms and conditions for your card.
Make sure you sign your credit card in the space on the back. If you don’t sign it, shopkeepers could refuse to accept your card for payments. And always check, before you use your credit card, that the shop or restaurant etc. accepts credit cards issued by your credit card company (Cartasì, VISA, Mastercard and American Express are the most common). The name of the company, and the name of the issuer (your bank, for example) must be indicated on your card.
When you use banks or other formal channels to send money the bank always asks you for an identity document. Sometime you discover that operators apply a limit to the amount you can send as remittances.
This is because the operators are applying anti-money-laundering laws. Money-laundering is an illegal activity that transforms money from criminal activities into “clean” money. Some criminal activities that might use money laundering are drug trafficking, arms trafficking, the trafficking of human organs, or other activities such as usury or mafia activities. The laundered, or “clean”, money is channelled back into normal economic activities in Italy and other countries. That’s why laws and checks have been introduced. The aim is to prevent operations of this sort and identify any operations that seem suspicious.
The three main things you need to know with regard to the checks carried out by the Bank of Italy to prevent money laundering are:
Don’t ever “lend” your name or documents to anybody else to send money. And don’t send money for other people who are not family members. If the money turned out to be “laundered” you could be accused of a crime – money-laundering – and of acting as an accomplice.
Operators notify the Bank of Italy of each money transfer amounting to more than 12,500 euros, in Italy or to another country. The sum of 12,500 euros could be sent in one operation or in a number of operations, where smaller amounts totalling 12,500 euros are transferred during any given week. The notification to the Bank of Italy does not involve any risk if the money is legal. If the Bank of Italy notices any suspicious transactions, it will decide whether it needs to investigate further. If it does decide to investigate, it will do so through the bank that carried out the transaction.
When you send a remittance by taking cash to a Money Transfer Operator, the anti-money-laundering law states that:
A) All transfers of less than 2,000 euros are free from restrictions;
B) For transfers of between 2,000 and 5,000 euros the Money Transfer Operator should ask you the reason for the transfer and a document showing where the money came from (for example your payslip);
C) The Money Transfer Operator cannot accept transfers of more than 5,000 euros paid in cash, or several transfers in one week amounting in total to over 5,000 euros.