Worst Advice Ever.
How many times you’ve heard friends and families asking you to save? Save enough to afford the things you want to buy? A gazillion times perhaps. But none of them took the effort to tell us the concept of taxes and inflation.
I am here to tell you that saving money in your bank account will turn it to a bucket load of cr#p.
Savings in a Bank Account
Low rate of interest vs. inflation
Some may argue that saving money in a bank account is the most risk-free way to save money and see it grow. You should save enough to live a risk-free life. These blokes do not know money.
In an economy like India, if you have saved INR 100,000 in a savings account of State Bank of India in 2019, you will earn INR 2,700 annualized interest in 2020 at the rate of 2.7%.
During the same phase, inflation was 9.78%, which means your money has lost 5.02% of its purchase power by sitting in the bank account. Not so lucrative saving scheme, isn’t it?
Wait, there’s more…
Your bank went out of business
Banks can go out of business. Let’s first understand how a bank works. A bank is an institution that takes money from consumers, where the consumer becomes the creditor and receives a certain interest on their savings. Bank uses this money to invest in the market to earn profits or loan it to other consumers or corporations to earn money through interest.
If a bank puts its money on a bad bet or gives a large chunk of money to a corporation that has defaulted. It loses your money. When a bank loses its money and is plagued with bad debts, it may go out of business. With it goes your money.
But banks have insurance. Yes. Money in banks is insured, however, only to a certain extent. If a bank has insurance for $75,000 per customer, and if you happen to have $100,000 in the account, you will receive $75,000 from insurance, and you lose $25,000. However, if the bank has a lower insurance cap, you risk losing a larger chunk of your life savings.
The Government will bail out banks. Yes. Government bailouts can happen to large financial institutions; however, it may not happen for all banks. Take the classic example of Lehman Brothers.
Government bails out banks or any large company or sector, by printing money out of thin air. It causes inflation. That means your money loses its power (read about M2 to know more). In simple terms, you are partially paying for that bailout.
In some unique scenarios, e.g. in Europe, due to slow down of economy and impact of the recession, banks are allowed to charge negative interest rates. That is when we pay the bank to store money in their accounts. Look around; we are in a recession.
A reputed bank is very secured. Yes and No. Read about Lehman Brothers. Many reputed banks and their CEOs were and are under investigation while you read this article.
Your money should grow exponentially to give you the purchasing power and protection against inflation, recession, job loss, and many other unforeseen scenarios.
Money in a bank will lose it’s purchasing power over time. Use your bank account to get your salary, pay your bills and expenses. Invest the rest in diversified portfolios based on your financial capacity and risk appetite.
This article is for informational purposes only. It should not be considered Financial or Legal Advice. Consult a financial professional before making any significant financial decisions.
