Published on: 9 April 2019
Modified on: 25 May 2023
Table of contents:
Money saved is money earned – but you cannot apply this to funds left idle in the bank. Idle cash that does not generate any return may ultimately cost you money. But what causes money to lose value even when stored securely in your account? The simple answer is the decrease in the value of money over the long term. As a result, there is a decline in purchasing power, leading to an unexpected increase in prices, also known as inflation.
Inflation impacts your idle funds, ultimately resulting in a loss. To know how you can avoid that loss, read on.
Earlier, money left in the bank generated returns at a meaningful rate and was also a convenient and safe option. However, the notorious combination of high inflation rates resulted in the depreciation of money value or a paltry return.
This is because banks pay interest rates less than the inflation rate. The inflation rate is essentially the rate at which money loses value. Take the average prevailing interest rates banks offer on our savings deposits today – about 4%. In contrast, the inflation rate in India for 2022 was about 6.67%.
To understand this better, here is an example: Suppose you have ₹1 lac in your savings account. At an interest rate of 4%, you’d earn ₹4,000 as interest. However, given the inflation rate of 6.67%, your funds ideally should be ₹6,670. When you adjust this against the interest, it shows that you lost ₹2,670.
Now the loss may not seem that high, but it adds up over time. Moreover, the loss may be even higher if you have a larger sum in your savings account. Suffice it to say that we put a lot at stake with every decision pertaining to money.
The bigger problem is the dynamic nature of money markets which increases risk and uncertainty. Markets move up and down in a cycle, and as such, you need to choose the right time, a suitable investment product and a good strategy to avoid losing money.
The fuzziness around inflation, volatility, market returns, and risk leaves no surefire way to multiply money. However, you can find a solution with due diligence and goal setting. Doing this will allow you to park your hard-earned money in a better way and earn inflation-beating returns than leaving idle cash in the bank.
There are two other ways of multiplying your money’s value. One is through short-term money instruments like trading derivatives, short-term bonds, etc. Fixed deposits are a safe option too.
The other option is long-term instruments. You can also buy index-based funds and mutual funds or invest in SIPs and ETFs to spread risk and peg your returns to the market. Your money allocations should be across sectors such that they focus on quality stocks.
You may even pick and choose from a multitude of mutual funds across industries with different maturities and investment types. Some of them also give regular dividends. Liquid funds provide stable returns, and you can also convert them to cash quickly.
What’s even better are the tax benefits and a lower expense ratio that such instruments offer to buyers. You can also beat inflation with debt funds if you have a moderate risk appetite.
With returns on ELSS and multi-cap funds over a 3 and 5-year period crossing 16%, investing in such funds can be beneficial. Furthermore, equity stocks and bonds come with high liquidity, as you can buy and sell them quickly in the secondary market. This way, a balanced portfolio can help you beat inflation in good or bad times.
However, these options are riskier than traditional instruments like fixed deposits, PPF, etc. Even then, the opportunity cost of idle money is higher than the risk premium paid in most cases. If you are risk averse, you can invest in FDs which can give up to 9% returns and leverage the magic of compound interest.
You can’t bury your head in the sand for financial decisions. Saving a decent amount for a rainy day is critical, but don’t let inflation eat away the purchasing power of a significant chunk of your 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 of your earnings.
If you’re ever short on savings, there’s always Fibe’s instant salary advance and instant personal loan to assist you.
In simple terms, devaluation is when one country adjusts its monetary policy, wherein the currency value goes down against that of the other. Devaluation ultimately results in a decrease in the value of the money, reducing its purchasing power.
As the adage goes, don’t put all your eggs in one basket. So, you can keep some money in your savings account as an emergency fund. But ensure that you invest in low, moderate, and high-risk investment avenues. This will ensure you get the best returns.
Inflation is one of the answers to the question of what causes money to lose value in a savings account. This is because the interest rate for a savings account is generally lower than the inflation rate, resulting in a loss.
Ideally, you should save money by investing in many options, such as FDs, PPFs, mutual funds, gold and more. This ensures that you don’t face a significant loss when there is a decrease in the value of money due to inflation and other economic causes.
The answer to this depends on the interest you earn. If the interest rate exceeds inflation, you can keep a high amount in a savings account. However, a smarter option to keep the value of your money intact is to invest it in various options such as FDs, mutual funds, or gold. This will allow you to make up for the decrease in the value of money by adjusting it against the high returns from another instrument.
Category : Finance
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