How money kept in FDs or in a Savings account can erode your purchasing power in the long run…
This story is for anyone who is having an income source today and has an aspiration to create his/her wealth for the future. And before jumping right down to the point on Fixed Deposits and Savings accounts, I would want to first introduce how wealth creation can be done.
- Plain and Simple → Earn and Save: You hustle and work harder to earn more and more every single day. And optimize on your expenses, so that Earnings -(minus) Expenses = Saved money increases, which in turn will end up becoming your wealth for the future. This saved money will be the wealth that you would need for the future when you won’t be able to hustle as much as you could today.
- Smarter and Effective → Make your Money work for you: Rather than putting your Savings (as explained in Point 1) in a bank or idle, you should put that money to work for you. So that your hustle to earn more and save more can yield better results, because your saved money will then be helping you create more wealth. So Making your Money work should be the most important thing in any hustler's mind.
Along with wealth creation, one should also understand the meaning of purchasing power. In simple words, it can be described as How many apples can be bought for 100 Rs today vs 5 years later i.e. the value of money held by you today will reduce tomorrow, and this is being caused due to one common phenomenon which is “Inflation”. Now the next obvious question should be that how does inflation impact my wealth creation.
To explain that, let us take an example — Assume you want to buy a Ball worth 100 Rs today, and annual inflation is at 5%. After one year the price of the Ball will become 100 X (1 + 5%) = 105, which means if you could afford the ball for 100 Rs today, next year you will have to pay 105 Rs for the same ball. In 12 years' time, the ball’s price will become 180 Rs. This is the power of inflation.
Now let us come back to our reason for wealth creation, you are creating wealth so that in the future when you can’t hustle and work your wealth should be enough to help you maintain your lifestyle and meet your basic needs. And logically you wouldn’t want to be in the situation where the purchasing power of your savings today reduces in the future and forces you to cut your expenses and makes it difficult for you to meet your basic necessities.
So given that we have now understood the basics of wealth creation, inflation, and purchasing power, let us now understand why one should not invest in FDs or Savings account.
Usually, FDs and Savings accounts give 4–5% annual returns on your savings, while the inflation hovers around 4–6% and at times goes to 8%. Now let us put the theses into numbers, assume you put 100 Rs today in Bank at a 5% rate of interest for the next 5 years; inflation is at 5%. Then at the end of 5 years, you would have 128 Rs approximately. Now if there is a ball worth 100 Rs today, its price at the end of the next 5 years after inflation would also be INR 128. So all in all your purchasing power remains the same, and if the inflation rate goes up in between then, in fact, your purchasing power would reduce. What you can buy today, you won’t be able to buy after 5 years. Isn’t that a bad thing, and demeans your today’s hustle? So to keep yourself rich in the future, avoid keeping your hard-earned money in a Savings account or Fixed Deposits.
Watch this space for more posts to understand where and how to invest your money in order to create wealth for the future and retain the purchasing power in the world of growing inflation.