Getting paid every month is one of the best feeling in the world, isn’t it? In our life, we work hard for 40-50 hours every week for 30-40 years to get a basic salary which helps us to become financially independent.
To meet our daily needs, we put that money in our savings account so that we can get cash easily whenever we need it.
Savings accounts give you an annual return of around 2% to 4%. It might not be the best return on investment, but it’s certainly better than nothing.
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Then why are savings accounts not more profitable?
The answer is inflation.
Unfortunately, India has one of the highest inflation rates in the world. Don’t worry because you can beat inflation by following these 3 simple steps.
Everyone is worried about inflation, as it increases the cost of even the basic necessities year after year.
Nowadays the inflation rate in the market is 6% or more. It is much higher in metro cities.
This means that the money which is not growing in the bank account continuously reduces your assets.
On doing the calculations, you will find that in 10-15 years, your purchasing power will reduce by around 20%-30%.
If we look at the inflation rate of the last few years, we find that inflation has always been higher than the returns people get on savings in their bank accounts.
As you can see, prices rise faster than savings, so the value of the money in your savings account will steadily decrease over time.
To combat this problem and make your money grow at or above inflation, invest it.
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Let's understand with a small example:
The interest rate for savings account is around 3.5%, while the inflation rate in India is around 4.5%.
So if you put Rs 100 in a savings account and earn 3.5% per annum interest, your invested money will become Rs 103.5 after one year.
But the items which cost Rs 100 a year ago, now cost Rs 104.5. Gradually, over many years, this difference keeps on increasing.
This means that if you put money in a savings account and earn 3.5% interest, you will need an additional Rs 1 to buy goods and services that you could have bought for Rs 100 a year ago.
Here is another example to understand inflation better:
Priya, Smita and Manisha are three friends. In 2020, each of them earned Rs 5 lakh.
Thinking that this money can be useful in an emergency like an epidemic, all three adopt different strategies regarding this money.
Priya likes to work through cash. He has deposited his money in the savings account.
Smita is not aware of any option to create an emergency fund, as a result, she also deposits this money in her bank account.
Manisha learns about the benefits of liquid funds and invests her money in liquid funds.
Read: What is inflation and its types?
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What will be the value of his investment in the next 20 years?
Every year the real value of Priya’s invested money depreciates. After 20 years, the value of Rs 5 lakh deposited in his bank account will be equal to only Rs 2.07 lakh. This is a drop of more than 50% in value. It turned out to be the most loss-making deal among the three.
In 20 years, the real value of Smita’s invested money will reduce from Rs 5 lakh to Rs 4.12 lakh. This is also not a profitable deal.
Manisha’s invested money will increase from Rs 5 lakh to Rs 8.32 lakh in actual terms. This is more than double the amount saved in his savings account.
Besides inflation, here are some other things to keep in mind, according to new data from the Open Government Data Platform:
Any interest above Rs 10,000 is added to your income and taxed at the prevailing income tax rate. If you earn between 5 to 10 LPA, then this is 20% income interest on your savings income. After deducting 20% on 3.5 – 4% savings interest, the savings return is only 2.8 – 3.2%. This clearly hurts you.
If you fall in the 2.5 – 5 LPA income slab, the actual post-tax returns would be only between 2.8 – 3.8% depending on your final income after adding savings interest.
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Is there any other option other than savings account where you can keep your money?
Yes, once you have some money in your savings account, you have a few options where you can park your money.
You should make the most of the remaining funds by investing them wisely. There are various types of investment options available, which:
- Pay better interest rates
- Help you reduce your tax bill
- Help you to increase your net worth
Your income and expenses determine where, when and how much you should invest.
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Best Saving Options
Given below are some of the options to make better use of your savings:
- Certificate of Deposit
- Mutual Funds
- Index Funds
Remember –save and invest first, spend later. Most of the people spend first after getting salary and invest later. The conclusion is that money should not be kept in a savings account or in your home. Always keep investing it in liquid funds.
The Money Club is India’s trusted AI-powered digital committee platform. It provides a trusted, new age platform for savings, high returns and easy borrowing. The main objective is to provide a savings solution that is better, cheaper and more reliable than banking systems. Committee system is one of the oldest forms of saving and investing ways to grow your money. FDs and RDs offer low interest rates of 3%-6%. In contrast, committees are a more lucrative investment where you can invest a fixed amount every month and earn higher returns (25% annually), and more value for money.
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