If your savings do not yield an inflation-adjusted return, you will become poorer, even if you have saved money for the future! One must be prudent to ensure financial security from the money one saves and invests today.
Most of us were taught that parking money in a savings account with a bank is the smart and safe way to manage savings and investments. You can certainly earn a little interest, your money is secure, and it is always there to withdraw whenever you need it.
But what if I warn you that this “safe” way of parking your savings might actually be making you poorer — slowly, quietly, and without you even realising it? Let’s talk about why that is happening.
The problem no one talks about
When your money remains in a savings account, it barely grows, even with the interest that the savings account earns periodically. Yes, the bank pays you a small amount of interest, but it is usually very low — maybe two per cent to three per cent a year, or some basis point more in exceptional cases – depending on the bank you have parked your savings.
Now compare that rate of return with the rate you pay for everything you buy and consume every year. The higher cost is known as inflation. That means everything you buy and consume is inflationary – in most cases, unstoppable. Now, inflation in many countries is around five per cent, or even more.
Here’s the catch
If your money grows by three per cent in the bank, but you pay at least five per cent more for everything you buy, you actually become poorer by diminishing your buying capacity with the same amount you have saved. Your savings with the interest thereon are not enough to buy what you could buy earlier with the same amount in the past, because the value of your money, even with the interest, is lower than the value of anything you buy now.
It doesn’t look like a loss because your balance is growing in terms of figures, but not in terms of value. While the value of your savings shrinks, affordability becomes harder. To understand the value erosion in your savings parked in the bank account, you need to calculate the interest rate you earn and compare it with the rate of inflation. For example, you earn an interest of three per cent on your savings in the bank and inflation is six per cent, that is the year-to-year hike in the cost of living, you are actually losing net three per cent.
An example you will easily understand
Let’s say you put ₹10,000 (or $10,000) into a savings account for five years and earn three per cent interest per year. After five years, you’ll have about ₹11,600.
Sounds good in terms of the figures, right?
But if prices have gone up by five per cent each year, the same ₹11,600 will buy you less than what your ₹10,000 could buy five years ago. In other words, your money is growing in your bank passbook in terms of numbers, but losing its buying power in real life.
So, what should you do instead?
You don’t need to take significant risks or become a financial expert to protect your hard-earned money from eroding value. It is important to understand your options—identifying the places where your money can grow and finding ways to beat inflation over time.
Look at a few smart alternatives
• Mutual funds
A great entry gate for beginners. You invest your money, and professionals manage it by allocating it into a mix of stocks, bonds, and other assets. Over time, mutual funds generally grow at a rate higher than inflation.
• Index funds / ETFs
These are like bundles of many different stocks. They are simple, low-cost, and tend to grow well over the long run.
• High-yield savings accounts
These accounts offer higher interest rates than standard ones, making them suitable for emergency funds, although they are not ideal for long-term growth.
• TIPS (inflation-protected bonds)
These are government bonds that grow with inflation, so they help protect your money’s value as you get a return on par with the fluctuation in inflation.
• Dividend stocks
These are shares of companies that regularly pay you dividends and can also appreciate in market value. You don’t have to invest all your money in them —start small and learn.
The bottom line
Saving money is a necessity for every individual. But letting all your money sit in a low-interest savings account for years? That is like pouring water into a leaky bucket — no matter how much you add, it keeps dripping away.
To achieve a more financially secure future, don’t let your money sit idle. It needs to grow.
Next time you look at your savings balance, ask yourself: Is your money really safe — or is it quietly getting poorer?
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Dharmendra Kumaar Pandey is the Founder and CEO, BigWallet Prime Wealth: PH 9967084021, Email: dharmendra@thebigwallet.in
