3 things you must know about your bank savings

According to the RBI Bulletin 2020-21, the most common and favourite way for Indians to save money is bank savings accounts – with more than 55% saving their money in them. The second preferred way is life insurances (>23%), followed by hard cash (>13%) and then mutual funds (~7%).

Why do you think this is the case?

  1. Safety of capital
  2. Lack of awareness of better options
  3. Lack of know-how to save better without compromising on Safety & Liquidity

Let’s start from the beginning: why do you even save money?

Everyone is in the race to earn and save more money. It might be for a future emergency or retirement, to travel the world, or to plan for your children’s future. You might be saving to attain financial freedom, while someone else might want to start a business of their own. Whatever be the reason, savings are undeniably needed to sustain your near and far future. 

Conventional ways of saving and returns

Keeping large sums of cash stashed at home has become a story of the bygone days (or is it!? 🤔).

But a majority of Indians keep their savings in the bank accounts. It is no surprise that the interest rates on bank savings have been going down dramatically. Of course, you think, “At least, my money is safe and is getting some returns, however low that is.”

Are you sure your saving method is really protecting your money from depleting?

Inflation and your savings

In last 10 years, average inflation rate in India has ranged been between 3.5% to 10%. The FD return rate has ranged between 3.8% to 6.5%. This means that over a span of time, there’s a guaranteed loss of your money’s purchasing power by 0 – 3% when kept in bank savings, RD and FDs.

Fixed Deposit Returns vs Inflation

Taxes and your savings

The post-tax returns, which is the real return you earn, is even lower. Depending on your tax slab, your net returns can further lower the value of your bank savings.

Post-tax real returns of Fixed Deposits over a span of 10 years

How safe are bank accounts?

Even if you ignore returns for a moment, how safe are bank savings really?

  • If the bank you are saving with faces bankruptcy, theft or crashes due to any reason – the maximum recovery amount is ₹5 lacs (Source: The Economic Times). It includes all your saving methods- savings account, FDs, RDs, and any other. So, if you have more than ₹5 lacs saved with your bank, your bank will not be responsible for losing that money.

Do you know what a ‘Bank-Run’ is?

when a large number of customers start withdrawing huge sum of their deposits from bank accounts at the same time, because they believe the bank may cease to function in the near future, it is called ‘bank-run’. Historically, during a bank-run, the banks are not able to meet the cash withdrawal requirements of their customers and ultimately default. So, just in case, if you were thinking that you will withdraw all your bank savings when there is a sign of a doomsday, that ain’t gonna happen 🥺.

In real sense, nothing is risk-free. What matters is how much risk are you willing to take and how much risk you should be taking with your money.

So what can you do?

  • Keep only that much saving in your bank accounts which you’ll need for regular, low value essential expenses such as your monthly groceries, rent, etc. Bank accounts are good for liquidity purpose, therefore its most convenient to use for your monthly and casual low value expenses.
  • You can also consider bank account for emergency needs to create a small pool of money which you can immediately withdraw if need be.
  • However, do not consider Fixed Deposits or Recurring Deposits for medium and long term investments. There are better options like mutual funds which averages out the risk in the long term, yet give far better returns.
  • If you’re foreseeing any short term or medium term large expenses (such as buying a bike, home furnishing, travel) or if you make repeating purchases every year (such as insurance renewals, kid’s education fee, etc.), then consider more diversified investments than bank accounts (👉 Multipl)
  • Bank savings are not always the most optimised choice for preserving your wealth. Market investments come with variety of risk-adjusted options which can be combined together to form your portfolio of savings. One can make far better returns and preserve the purchasing power of their money by saving regularly in investments that suit their risk appetite and their risk capacity.