If you have any savings that you do not need in the near future, you can consider investing it in something that gives you a return. At the moment, interest rates in Denmark are so low that at most banks you have a deposit rate of 0%, which means you do not get any interest income on your savings. In the short run it is okay, but if you have a long-term perspective with your savings, you should definitely consider whether it makes sense for you to invest the money, as their value over time will decrease due to inflation.
Let’s look at an example where inflation is 1% per year.
If you today add 10,000 to an account with a deposit rate of 0% and leave them for 5 years, you will in 5 years still have 10,000 remaining in the account as you have not received any interest.
However, due to inflation the prices on goods will increase over the 5 years by 1% per year. What you can buy today for the 10,000, will in 5 years cost you 10,510.10 (10,000 * (1,01) ^ 5). The price of goods has thus risen by about 500 in 5 years, whereas your money in the bank is unchanged over 5 years. Your money will thus be worth less in 5 years.
This factor is one of the reasons why we have chosen to invest parts of our savings. We do not want our money to lose value, but rather that they grow with inflation – and hopefully more. As mentioned, we only invest part of our savings, due to the risk involved in investing. An investment may potentially rise a lot in value, but you may also lose a lot. Therefore, we never invest more than we can withstand losing and we are only investing money, which we know should not be used in the near future. The uncertainty of short-term investments can simply be too big.