A lot of people believe that putting money in the bank is risk-free. They’re just happy to receive interest on their deposits and watch their money grow.
But because of inflation, what they don’t realize is that they’re actually losing money by leaving their cash in the bank for many years.
How? Consider the illustration below.
The Price of Rice
In 2004, the price per kilo of regular milled rice in Metro Manila is P18.63. This means if you had P10,000 back then, you could buy 536.77 kilograms of rice.
In 2014, after 10 years, the price per kilo of this commodity in Metro Manila is now P36.00. So how many kilograms of rice can you afford today, if you simply placed that P10,000 in a savings account for 10 years?
According to historical data, bank deposit interest rates back in 2004 was 6.18% per annum (which is higher than what I remember). Assuming your money enjoyed that rate for 10 years, and all the interest earned was tax-free, then here’s how you lose money.
As you can see, you can now afford less rice, 30.80 kilos less to be exact. Multiply that by the current price and we can say that you just lost P1,108.75 (30.80 kgs x P36.00).
Do you still think your money in the bank is risk-free?
How To Not Lose Money
To best way to not lose money is to put it in an investment that earns more than the inflation rate over the long-term. There are many of them out there, but let’s pick a specific one for purposes of illustration.
In January 2004, the Net Asset Value per Unit (NAVPU) of BDO’s Peso Balanced Fund was 1,124.5934. If you invested that P10,000 back then, you’ll have 8.8921 units of participation.
In January 2014, the NAVPU of BDO’s Peso Balanced Fund was 3,443.7508. If you redeemed your investment during that time, you would receive P30,622.19 (computed by multiplying 8.8921 units by 3,443.7508).
How many kilos of rice can you buy with that much money today? The answer is 850.62 kilos of rice or 58.47% more than you could afford 10 years ago!
So Savings Accounts Are Useless?
Now, don’t withdraw all your money from the bank!
Savings accounts and time deposits are not useless because they have their own purpose in your financial plan.
It’s a great place to put your emergency fund, along with the money that you plan to spend in the next 2 years.
For the money that you plan to use in the future, say three or more years from now, such as your retirement fund – then the best place to put them is in an investment.
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