Inflation: How Is Rising Inflation Eating Away at Your Savings?

In today's article, I will be arguing how inflation eats way our savings. I just want to clear the misconceptions of money that is very popular among many people living in our society. At the end, I will be writing on how we can prevent ourselves from inflation.

BANK SAVINGS ARE GOOD

Many people save their money in bank. They assume that bank pays interest in our capital (savings) and it helps to grow our savings, which is true, bank pays interest. But, I argue that, the interest paid by banks won't help increase our savings. 

How many of we know about Inflation eating away our savings??

Inflation means the rise in the price of goods and services. Almost every year, there is inflation of certain percentage. This concept is very common to us because we know the price of many good and services increase every year. But most of we are unaware of it.

Many people in Nepalese society don't have financial literacy. They just know how to earn money and save it in the bank's saving account, which gives you very few interests rate. But we never understand the other side of this whole story.

How do banks pay us interest?

Banks collect money from the normal public like you and me. They invest the same money in other sector (mostly loans). They provide certain percentage interest to us, let's say 2% and give loans to other people at 12% (just an example). Here, the difference of 10% is the income of banks. Well, I don't want to go into this matter in deep. I am just trying to explain, how inflation is going to eat your money while you save money at bank's saving account and assume that your savings will grow.

Let's say, bank is giving you an interest of 2% per annum in your savings. That mean, if you save Rs. 1,000 in bank, you will get Rs. 20 as an interest amount. 

In the other side, let's say we have inflation of 4% in one year. (Note: Inflation rate might vary every year). Then, the value of your 1,000 will be Rs. 960. Here, the purchasing power of our money is lost by Rs. 40, as the price of commodities and services have increased by 4%. (Inflation decreases the purchasing power of our money) 

So, here bank has paid you and interest of Rs. 20 and inflation has eaten your money's value by Rs. 40. Congratulations, overall you made a loss of Rs. 20 on your saving of Rs. 1,000 on bank's saving account.

If Inflation Is Eating Away Our Money, Then How Can We Solve This Issue And Increase Our Savings??

To prevent ourselves from the danger of inflation, we just need to keep our money in such place where our money will grow more than the rate of inflation. Let's say, inflation rate is 4% per annum. In this case, you have to keep money in such place where your return is higher than 4%. This way you will be staying away from the trap of inflation and also away from the misconception that, "Savings account will increase you capital with certain percentage of interest on it."

The answer is simple. Just invest your money like many financially educated people do. There are many investment tools there. Some of them are:

1. Bank's Fix Deposit
2. Stock Market
3. Bonds/ Debentures
4. Real Estate
5. Business

Out of above mentioned investment tools, Bank's FD is the simple solution to many people, who just want to play it safe and stay away from the trap of inflation. Bank's FD is a very secure investment tool, where the returns are always very higher than the saving account and also usually higher than the inflation rate of our country. (Bonds/ Debentures are also safe investments, as they pay fix return on our capital.)

Well, Bank's FD are for those who does not want to take much risk of their capital and stay away from the trap of inflation. 

For Example:

You keep your savings on Bank FD at 8% per annum and inflation rate is 4% per annum, then your money will grow by 4% (8%-4%).

So to conclude this, I recommend keeping your money on those investment tools that pay more interest than the inflation rate. I recommend BANK'S FD because this is more secure and usually pays higher interest than inflation rate.

Note: I am not saying reader's that you shouldn't save money in your bank's saving account. I am just recommending to keep those money you are willing to invest in Investment Tools. 

Important: The money you need frequently are quite better in Bank's Saving Account.

- Sanjok Thapa