How to calculate the effect of inflation on money lying around in a checking account?

[OxygeN]

Hi all.
I'd like to know/understand/learn how to calculate the effect (in terms of CHF loss) of inflation on a theoretical checking account which holds CHF 100k for the whole year.

The checking account does not yield anything, as it has 0% interest rate.
The yearly costs of the bank account are CHF 120.-
Inflation in 2023 has been 2.1% (according to https://www.bfs.admin.ch/bfs/de/home/statistiken/preise/landesindex-konsumentenpreise.html)

How would I have to "put the pieces together", to finally have a number which tells me how much less I would have on my bank account?
TIA

 

[Baptiste Wicht]

Hi,

I am not sure I understand the relation to inflation.
Inflation will not make you have less money, only the fees will.

So, the money on your bank account will be (100'000 - 120 * Y), with Y being the years.
However, inflation will mean that your purchase power will be lower. So, 100'000 CHF this year are only "worth" 97900 (100000 * (1-0.21%)).
If you put these two pieces together, you will know how much will the value vary each year.

 

[OxygeN]

Hi Baptiste.
In fact I wanted to know how much my money would be worth - of course inflation does not reduce the amount of money I have on my bank account

Is the inflation value for 2023 the correct one from that URL I linked above?

So basically, if I'd like to "fight" inflation I would need to make my CHF 100'000.- grow at least that much to cover for the decrease in worth caused by inflation, right? So with the above figures, I'd have to make the 100k become something around 102'200.-?! Is there any formula that can be used to calculate the latter?

 

[justatreeinthesea]

This is not answering your question directly, but if you're holding this amount of cash to pay your taxes, I would use Alpian instead of that very expensive account. No fees and 1% (for now) interest until you need to move it out. also, there is no restriction on the amount you can transfer out.
For longer term, but shorter than for retirement (ETF, etc.), there are not many options to counter the effect of inflation :/. Baptiste has an article on the blog about short term investments.

 

[Baptiste Wicht]

Is the inflation value for 2023 the correct one from that URL I linked above?

Yes, that's the correct source of information for Switzerland.

So basically, if I'd like to "fight" inflation I would need to make my CHF 100'000.- grow at least that much to cover for the decrease in worth caused by inflation, right?

Yes, if you want to cancel the effects of inflation, you need to have returns at least at the same level of inflation. In your case, you need to also make 100 CHF extra, to fight for the fees.

But it's basically impossible with cash. Interest rate is almost always lower than inflation. So, you have to accept that cash has a cost.

 

[OxygeN]

Yes, that's the correct source of information for Switzerland.

Thanks for confirming.

Yes, if you want to cancel the effects of inflation, you need to have returns at least at the same level of inflation. In your case, you need to also make 100 CHF extra, to fight for the fees.

Thanks for validating this as well.

But it's basically impossible with cash. Interest rate is almost always lower than inflation. So, you have to accept that cash has a cost.

This is the goal I'm aiming at: to make things clear to others (to me it is already clear) that keeping that much money on a checking account with 0% interest is just "paying money to have the money kept by someone (the bank)".
It is way better, if not to invest it, to put it on a savings account where some % interests are being generated - and possibly on such an account which has no fees.

 

[OxygeN]

This is not answering your question directly, but if you're holding this amount of cash to pay your taxes, I would use Alpian instead of that very expensive account. No fees and 1% (for now) interest until you need to move it out. also, there is no restriction on the amount you can transfer out.

Thanks for the hint. I was looking at wiLLBe as well - how would that compare to Alpian?

 

[justatreeinthesea]

Thanks for the hint. I was looking at weLLBe as well - how would that compare to Alpian?

wiLLBe is OK if you have less than a 100k and can make transfers from/to an account under your name (not IBKR per example). It's really where money goes to hibernate, but the good thing is that you can transfer any amount in and out, at any time.
Alpian is more flexible and agile, but the multi-currency account also has its drawbacks.

 

[OxygeN]

wiLLBe is OK if you have less than a 100k and can make transfers from/to an account under your name (not IBKR per example). It's really where money goes to hibernate, but the good thing is that you can transfer any amount in and out, at any time.
Alpian is more flexible and agile, but the multi-currency account also has its drawbacks.

I'll compare Alpian against wiLLBe - thanks. I just need the account in CHF - for EUR I already have Wise and Revolut (and I don't have more than a few thousand Euros on - just for yearly vacation expenses).

 

[justatreeinthesea]

I just remembered that there is another fee to take into consideration: wealth tax. Your marginal rate might be high enough that it could have a significant impact on the expected returns on that amount.
So, inflation + wealth tax = very bad deal on money lying around. For me, it's the price to pay for taking the time to make a decision, since some allocations are final (2nd pillar, taxes).

 

[OxygeN]

I just remembered that there is another fee to take into consideration: wealth tax. Your marginal rate might be high enough that it could have a significant impact on the expected returns on that amount.

Uff... again this "marginal rate" - I have to calculate mine ASAP! ;-)

So, inflation + wealth tax = very bad deal on money lying around. For me, it's the price to pay for taking the time to make a decision, since some allocations are final (2nd pillar, taxes).

What do you mean exactly by "time to make a decision"?

 

[justatreeinthesea]

Uff... again this "marginal rate" - I have to calculate mine ASAP! ;-)

I did a quick test with https://swisstaxcalculator.estv.admin.ch/#/calculator/income-wealth-tax, picking Bern as the state of residence.
When going from 500k to 600k, the marginal rate is 0.46%.
So, that's almost half of the 1% one gets on an Alpian account

What do you mean exactly by "time to make a decision"?

Once you send your money to your pension fund or to the taxman, it's gone, you can't get it back, so you have to be certain that it's what you want to do with your extra cash.
But it's true that there is no penalty for most of the calendar year. You just have to make up your mind before the 31st of December, because that's what's being used to calculate the amount owed.

 

[OxygeN]

Hi again.
With the tax calculator you linked, does it matter which type of income I choose (Step 8 - type of income)?
And at step 9 "Net worth": where do I get this figure from?