The lesson of saving money comes like any other life lesson to us, as we grow. Every piggy bank in each child’s home is a mere reference to such a practice of inculcating the habit of saving money. But why? Well, most people believe it is for the security of one’s future. It is not just these lessons at home. Hoardings, television ads, magazine and newspaper ads have been a constant aide-mémoire for the same. The faint childhood memory of a money plant being a representative of money which grows over the period of time, if nurtured, is symbolic of how money deposited in banks grows in amount.

The faint childhood memory of a money plant being a representative of money which grows over the period of time, if nurtured, is symbolic of how money deposited in banks grows in amount.

But is savings the smart choice? In most cases, people deposit a chunk of their earnings in savings account of banks and let them grow at the rate of interest offered by banks. This is mostly done for their long term goals and expenses. In India, there is a concept of parents saving money right from the time of birth of their children, particularly girls, for their marriage. Other long term expenses are also accounted for, depending on the earning capacity. In our race to save more and more, is our future actually being secured?

Savings need to grow in a smart and sustainable way, which may prove actually profitable in future. | Photo Courtesy: Taxcredits.net

Savings need to grow in a smart and sustainable way, which may prove actually profitable in future. | Photo Courtesy: Taxcredits.net

Can your savings handle inflation?

Mr. Sharma had been saving money for his daughter from the time of her birth. Attracted by the seemingly high rate of interest offered by most trustworthy banks, he kept depositing money hoping for high returns after a long period of 15-20 years. He was a self-righteous man who always wanted to escape from the complex web of loans or other forms of indebtedness. Hence, he was determined to save more and more to secure his future finances at the cost of his current expenses. To his dismay, at the time of his daughter’s higher education, the inflation rate had witnessed a great leap, of about 15% over the period. Meanwhile, the savings could barely earn him a 5% increase in the amount that he deposited. To bridge this difference, he had no option but to take a loan for his daughter’s education. This implies that Mr. Sharma’s present and future were both subjected to high risk.

If we are trying to secure our future, at the cost of our present, which in turn is reducing our purchasing power, then it’s time that we rethink.

The low rate of interest on money deposited in savings account leads us not too far away. Most banks offer an average of 4-6% of interest rate per annum. In competition to inflation, the growth for money in savings account is negligible. Instead of securing our future, the money in savings account is actually reducing our purchasing power. In simple terms, a deposit of 100 bucks at the rate of 4% interest in savings account every year will give us 104 buck by the end of the year. However, 7% inflation in a year would require us to spend 107 buck, thus reducing our purchasing power by 3 bucks. If we are trying to secure our future, at the cost of our present, which in turn is reducing our purchasing power, then it’s time that we rethink.

To avert such a crisis in purchasing power, we must think of other instruments of investment that would give us the returns which enhance our capability to cope with inflation.

The money in our saving accounts is just dead money with no real benefits and therefore for these changing times our money motto also requires a change, from Paise ko Bachao to “Paise ko Jagao”.


Featured image source: Visual Hunt

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Posted by The Indian Economist