From deposits to diamonds: seven ways to use your free funds


Many Estonians have larger amounts of free money on their accounts, which come from inheritance, sale of existing real estate, gifts, or dividends. Most people keep the money on their bank account instead of growing it to make sure it is there for when the need arises.

According to Kristiina Toomei, the Deposit Product Manager at Holm Bank, most of us are rather poor savers due to the legacy of the Soviet era.

‘We have had to live through times when we could only dream of good things. Therefore, it is not surprising that free funds are immediately used to improve your quality of life. For example, people gladly invest in a new car, purchase better household appliances, do repairs at home, or go on a family vacation,’ said Toomei.

Deciding what to do with free funds always takes time. However, the free funds on the account lose value over time and constitute an additional source of risks.

‘There are different kinds of risks – some are internal and some external. If people have a larger sum of money on their account, they are always able to make spontaneous emotion-based purchases with which they tend to reach into savings. In addition, a lot of people have linked their accounts to online shopping environments, which makes their money vulnerable to cybercriminals. The safest way of handling your money is keeping it untied to any payment card and requiring you to act consciously to access it. The time it takes to access the funds acts as a reflection period, which allows you to figure out whether you really do want to spend that money here and now,’ advised the representative of Holm Bank.

According to her, there are several ways to grow or utilise your savings or larger income, each with their own benefits and risks.

  • The representative of Holm Bank says that depositing is definitely not the service to make you rich. Rather, it is a way to save up and preserve your money for future investments while increasing the funds with the support of the service provider. Large banks offer deposit interests of about 0.2%, which is almost non-existent. The interest rates of smaller banks are noticeably higher, for example up to 2.5% at Holm Bank. Unlike the savings and loan associations who offer very high interests, the deposits of banks are always guaranteed. The banks whose deposits are reimbursed by the Guarantee Fund are listed on the website of the Guarantee Fund. Even in case there is a banking crisis and the depositing bank goes bankrupt, 100,000 euros per depositor per credit institution is guaranteed.
  • According to Toomei, the share market offers some excitement and opportunities to make a large amount of your money grow even larger. ‘On the other hand, I think shares are like electrical works – if you do not know what you are doing, it is better to trust the professionals. A person who cannot read the signals of the financial market and adequately assess the impact of the actions of different companies on the price of their shares can quite easily become vulnerable on the share market and lose large sums of money,’ said Toomei.
  • Paying off the balance of a loan or an instalment According to Toomei, you should always consider whether you could use free funds to reduce your debt burden. However, she only recommends it for loans with high interest rates that you could pay back in full. ‘For example, it would not be wise to pay off your home loan partially as this would not change your loan payments and the interest rates on home loans are generally quite low. In that case, some other, higher-yielding outputs for your free funds would be worth considering,’ she said. However, it would be wise to pay off consumer loans or leases which may have interest rates higher than 10% and which would leave more money on your account on pay day, once paid off in full. Paying off consumer loans early increases a person’s creditworthiness, which means that in the future, when applying for a loan, you will be seen as a responsible consumer and will be offered a lower interest rate.
  • Investing in real estate. Many people consider either buying a new home or repairing their current one when receiving a larger sum of money. The price level of today’s real estate market is not the most favourable for buying and this probably means taking out a loan. Therefore, the representative of Holm Bank says that while the value of real estate investment increases over time, you also have to take into account the considerable other expenses related to owning real estate in addition to loan payments. Home repairs are a wise investment if you are making the repairs to maintain your home in good order or to improve your living conditions. Experts consider repairing real estate meant for sale rather unwise – it does not increase the price significantly and it is more likely that you take away the future owner’s chance to design their home after their own taste.
  • Investing in forests, gold, or diamonds. These days, investing in forests has become a sort of a way of protecting them. On the other hand, even best-kept forests need to get an extensive cut sooner or later, if the owner needs to cash in their investment. ‘Then again, investing in coins and diamonds is definitely the kind of activity that should be left to the experts. It is easy to deceive unwitting investment enthusiasts with unreasonably high prices and keeping these tiny valuables at home or making them into jewellery always puts them at risk of being stolen or simply being lost,’ said Toomei.
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