Holding money in non-cash form in a current bank account is slightly more resistant to inflation. It has the advantage that you can handle the money at any time and it is also kept relatively safe. At the same time, the bank normally credits you with some interest. Given that Slovakia is part of the euro area, where the European Central Bank's base interest rates are currently close to zero, banks pay virtually no interest on current accounts either. So if you want to at least partially appreciate the value of your money in a bank account in Slovakia, it's worth setting up a savings account alongside your current account. Even there, however, you cannot expect a very high interest rate. If we take into account the taxation of interest income, money in bank accounts in Slovakia does not de facto appreciate in value. In Slovakia, interest income is taxed at a 19% tax rate.
Example:
Prima banka offers a savings account for a student account with an interest rate of 5 per cent per year. However, to calculate the actual change in the purchasing power of a deposit of EUR 1 000, we need to take inflation into account. As we already know, inflation averaged 3.2 per cent in 2021. The real interest rate was therefore 1.8 per cent (5 -3.2 = 1.8). In one year, the purchasing power of €1,000 has thus increased by €18.
Calculation:
1,000 x 0.018 = €18 The real purchasing power of the €1,000 we deposited in a savings account with Prima banka at the beginning of 2021 has increased by that much.
But beware! We were told that interest on deposits is taxed at a 19% tax rate.
If we deposit 1,000 thousand euros in a savings account with a 5 percent interest rate, the bank will credit us 50 euros as interest at the end of the year. However, it will also deduct a 19 per cent tax on it, so in reality it will only credit us with 40.5 euros (19 per cent of 50 euros is 9.5 euros, so 50 - 9.5 = 40.5).
In that case, the effective interest rate is not 5 per cent, but only 4.05 per cent (40.5/1000)x100. Taking inflation into account, the real effective interest rate is thus only 0.85 per cent. The purchasing power of €1,000 has therefore only increased by €8.5 during 2021.
