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How your savings account makes you POOR

Last updated on: July 19, 2011 17:04 IST

How your savings account makes you POOR

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Anil Gupta, Am22Tech.com

Ever wondered how much interest do you earn when you park your hard earned money in a savings bank account? You actually are losing money everyday if you keep it there.

How?

Savings bank account in India is entitled to get 3.5 per cent per annum as mandated by the government. If we consider a simple example where the interest is compounded by yearly (paid every 6 months), then your initial Rs 100 will become Rs 103.53 after an year. So, you would have earned Rs 3.53 by keeping you money in savings bank account.

NEXT: Effect of taxation

Courtesy: Am22tech.com



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How your savings account makes you POOR

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Effect of taxation

The interest earned from savings bank account is taxable. So, if we simply calculate the tax on Rs 3.53, it would be something like this:

So, effectively you would be earning Rs 3.17 (3.17 per cent) interest post tax on your investments in savings bank if you belong to the 10 per cent slab and 2.44 per cent if you are in the highest tax bracket.

This is just an example showing you the effect on Rs 100.

NEXT: How do we lose money then?



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How your savings account makes you POOR

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How do we lose money then?

You may argue that how come we are losing money here even though the post tax results are positive in highest tax bracket too. But this return is positive until you do NOT account for the other factors which affect your money. I am talking about a virtual factor like inflation.

You may have read a lot about inflation in newspaper and would hear about it on news channels these days. But have you ever calculated the difference it makes to your pocket? Most of the times, we only take note of the rising prices of commodities. But inflatin affects your savings also.

Inflation is nothing but decreasing purchasing power of your money. Hence, if we say that inflation is at 10 per cent, it essentially means that the purchasing power of your Rs 100 is decreasing by 10 per cent in a given time frame. That is, what you could purchase in Rs 100 earlier is now available in Rs 110.

So, if we relate this point with the earning in your savings bank and keeping the inflation rate at 8 per cent per annum, you are effectively losing 4.83 per cent (8 - 3.17 per cent) every year!

Surprising yes, but true nevertheless. A high inflation rate of 8 to 9 per cent means you are not making money on your savings bank deposits but your wealth is losing its value over time.

NEXT: What is the way out?



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What is the way out?

Well, the only way out is to invest your money in a options that give returns more than 10 per cent to actually keep it at least at par at what you had invested.

For example, gold has always been an instrument whose value grows by at least 10 per cent year on year. You can buy gold today and sell it at higher price next year to gain and at least make sure that your money's worth is still same if not higher.

Other options could be to invest in PPF which currently has an interest rate of 9.5 per cent per annum with tax benefits.

Investing in mutual funds which provide yields more than 10 per cent are also good options. Also, investing in real estate has proved magical for most of the people. If you have the bandwidth to invest in real estate, please do it as early as possible in your life.

Land is shrinking every day and population is expanding at double the rate, so you can expect an increase in your property's worth every year!



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