Written on 23 December 2021
The Next Big Move
Is the Savings Account still Relevant?
In the ever-changing economy, we are slowly taught to adapt to different changes, as well as to bend around sticky situations. Practicing the same skill and craft is no longer the minimum requirement for a job but the adaptability to handle many hats of the company is. This is the same for financial management.
Many years ago managing money is straightforward and simple. You earn money, you save the money, you pay for your bills, and then you retire with the savings that you managed to accumulate for many years. Today, with High yield investment vehicles, tiered interest bank accounts, and the ever present inflation, we find that such practice is no longer effective in achieving a comfortable retirement life.
Before we go into why this is so, we need to understand why the past practices are no longer allowing achieving the quality of life that we desire. Back in 1985, the average savings account interest rate was 6.3%. with such attractive interest the more money we saved, the higher the compounding return we will enjoy. Eventually, when the capital is big enough, you will be able to enjoy your retirement life spending on just the interest generated on the savings, or only having to draw very small amounts from the savings on top of the high interest that you are receiving.
For all forms of investment or saving vehicles, the real return is one that considers the inflationary adjustment of everyday products that we have to use. Given that the inflation rate in 1985 was only 0.48%, the real return on your savings account is 5.82%.
Fast forward to 2021, the inflation has risen to an average of 3% and the average savings account has an average return of 0.11%. This means that we are no longer earning high returns from the bank accounts, and everyday products that we need to buy are getting more and more expensive. If I were to put all my money into a savings account, my real return is negative 2.89%!
Based on a monthly savings of $500 per month, and a constant real return of 5.82%, after saving for 20 years (240 months) you will have a total of $226,156.71. The amount will continue to grow due to the effect of compounding interest, even if the real return has diminished over the years, the interest from such a large sum of money will yield a pretty amount used for retirement.
On the flip side, if the constant real return is negative 2.89%, not only will the capital be diminished, but the total amount will also be far lesser than that in the first scenario. The total amount that you will get back at the end of 20 years is only $91,219.03
In conclusion, If you intend to retire by only saving your money in a bank account, think again! The savings account is a good financial instrument where you can earn some interest while having the flexibility to withdraw when you require it. For other long-term goals like retirement and family planning-related expenses, do consider a mixture of instruments to achieve a reasonable and logical return.
With a plethora of financial vehicles targeted at helping you grow your money, make sure you make full use of them. These can come in the form of investments as well as endowments by banks in insurance companies. It is also important to know when you need the money by and your own risk appetite. This will ensure that the money that you have are not idle and losing value slowly in your bank account.
Those who are new to investments and may be wary of loss and scams, fear not, you can always start small, and then increase the amount slowly at a pace that is comfortable. After all, Time in the market is better than timing the market.
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