Keeping your money in a bank might seem like a safe and sound decision – after all, it earns you interest every month, right? But is it really worth it?
In recent years, interest rates on savings accounts have been at an all-time low. This has led many people to wonder if keeping their money in a savings bank account is worth it.
In this article, we will explore the reasons why keeping your money in a bank isn’t actually a wise financial decision.
Benefits Of Keeping Your Money In Saving Accounts
While the interest rate of savings accounts may be low, there are still several benefits to keeping your money in a savings account.
- First, bank deposits of up to ₹5,00,000 is insured by the Deposit Insurance And Credit Guarantee Corporation (DICGC), which means your money is protected in the event of a bank failure.
- Second, savings accounts are easy to access. You can transfer money from a savings account to a checking account instantly and without any fees.
- Finally, you have a great deal of flexibility when it comes to how often you withdraw money. You can withdraw money from a savings account at any time without penalty, although you will be charged a fee if you make many withdrawals in a short period of time
Disadvantages Of Keeping Your Money In Saving Accounts
By now you must be wondering if there are so many advantages, then how do you become poorer by keeping your money idle in a savings account?
The reason for this inflation.
As you might know, inflation is the rate at which the prices of goods and services rise in an economy over a period of time. While inflation is a natural phenomenon, its effects can be devastating for your savings and investments. Inflation eats into the purchasing power of your money, making it worth less than what you had originally saved.
Let us understand this with an example:
Here’s an example: Say you deposit ₹ 100 into his savings account with ABC Bank at 4% interest per year. Over time (assuming no outside investment opportunities arise), this will work out to be ₹ 4 in interest every year (₹ 100 x 4%). Thus, ₹ 100 will grow to ₹ 104 at the end of the first year.
However, the actual inflation rate in India has been hovering at around 7%. This means that the prices of goods and services next year will go up by 7%. Hence something that costs ₹ 100 today will cost ₹ 107 next year.
Thus, while you have earned 4% from the savings bank interest, it is still not enough to combat the inflation rate of 7%. In other words, the money kept in your savings bank has lost purchasing power over time!
Thus, keeping your money in the bank is actually making you poorer.
Where should you invest your money then?
As you might have already understood, you must invest your money in assets that earn you returns that are more than the investment rate. The investment rate is the average inflation rate. If you can earn more than this, then over time you will be richer. So, if the average inflation rate is 7% and the investment rate is 8%, then by investing your money in assets that earn you 8% or more per annum, you are actually making yourself richer!
Here we recommend to check our Index Long Term Strategy. In this strategy, we advise to invest in Index and hedge them against the market fall. The investor get CAGR returns around 18% to 19% with a low drawdown of 4%. It will help you to achieve your financial freedom.
When does keeping your money in a savings bank account make sense?
One of the drawbacks of keeping money in long term investments like equity, real estate, and gold is that they cannot be easily liquidated in the event of an emergency. For this reason, many people like to have a savings bank account where they keep a portion of their savings.
They can withdraw money from the savings account at any time in an emergency, but still, earn interest on the money that remains in the account.
In our opinion, you must create an emergency fund that you can withdraw quickly if a sudden need arises. You must keep this fund in very liquid assets that can be withdrawn quickly. Needless to say, a savings account is one of the most liquid assets available, so a large portion of your emergency fund must be kept in it, even if you do not earn much from it.
You can keep the emergency amount in the savings account and then invest the rest in long-term or semi-liquid assets.
Conclusion
As you have seen, keeping your money in a bank is not actually making you richer. In fact, over time, bank deposits tend to lose value due to the low interest rates that are offered and the inflation that reduces the purchasing power.
So, do not keep all your money idle in a bank and take the necessary steps to invest it in the high-yield assets to ensure that your money keeps growing year after year.
Do not forgot to check our Index Long Term Strategy to achieve financial freedom.
Happy Investing!
This article is for education purpose only. Kindly consult with your financial advisor before doing any kind of investment.
Thanks for pointing out that you will have easy access to your savings when you open a bank account. My husband and I will consider this tip because we want to easily monitor our savings and expenses to better manage our finances.