14 May 2020
Money saved is money earned – but this is not equivalent to funds left idle in the bank. Idle cash that does not generate any return may ultimately be costing you money after accounting for inflation when you’re calculating the real-adjusted returns.
In earlier times, money left in the bank generated at least a somewhat meaningful real rate of returns and was also a convenient and safe option. However, the notorious combo of high inflation rates and rising fees either depreciate the money value or earns a paltry return. This is because the banks pay interest less than inflation, which is essentially the rate at which money loses value.
Take the standard prevailing interest rates banks offer on our savings deposits today – about 4%. The inflation rate in India for 2018 was about 4.74%. If you parked Rs 1 lakh in your savings account at this time, you’d receive Rs 4,000 as interest, but lose Rs 4740 as your money lost its purchasing power. The net result? You’d lose an overall sum of Rs 740!
We put a lot at stake with every decision pertaining to money. The bigger problem is with the dynamic nature of the money markets that increases risk and uncertainty. Markets move up and down in a cycle. You need to choose the right time, suitable investment product and strategy to avoid losing money. The fuzziness around inflation, volatility, market returns and risk leaves no surefire way to multiply money. However, with some due diligence and goal setting, you can park your hard-earned money in a way better than the strategy, if you can call it that, of leaving idle cash in the bank.
There are two other ways of multiplying your money’s value:
Liquid funds provide stable funds and can also be converted to cash quickly. What’s even better is the tax benefits and a lower expense ratio that many such instruments offer to their buyers. You can also beat inflation with debt funds if you have a moderate risk appetite. The return on ELSS and multi-cap funds over a 3 and 5-year period have crossed 16 per cent.
Equity stocks and bonds come with high liquidity as they can be bought and sold quickly in the secondary market. A balanced portfolio can help you whether good or bad times and beat inflation. They are riskier than traditional instruments like fixed deposits, PPF, etc. However, the opportunity cost of idle money is higher than the risk premium paid in most cases. If you are risk averse, then you can invest in FDs which give up to 9% return and leverage the magic of compound interest.
You can’t bury your head in the sand for finance decisions. Saving a decent amount for a rainy day is critical, but we can’t let inflation eat away the purchasing power of a significant chunk of our money. Just as little drops of water make the mighty ocean, a small amount of money appreciation can make you significantly wealthier in the long run. Allocate money judiciously in different instruments and make the most out your earnings. And if you’re ever short on savings, there’s always EarlySalary’s instant salary advance to assist you.