Inflation Is A Killer
If you saved your cash at 0.5% per year yet inflation was 2%, what is happening to your money? If you understand inflation, you will know that the real value of those savings is diminished; understanding this is an easy way to see that whilst your money is growing in a bank, its value may not be.
Have a look at the figure below:
Now, if you stashed away your savings in a bank, with their low-interest rates and for the same time — how useful would those funds be for, say, your retirement? Not very useful at all, would it?
This is why it is imperative to understand our savings profit after inflation. For example, your account pays you 2% interest per year which means you have more money after a year — great! However, if the inflation rate is higher than the interest, that money can purchase/achieve less than the amount you began with…ouch.
Have a look at the average bank savings rates and then the rate of inflation where you are — you may be in for a surprise!
Deposit Insurance
If my money is in a bank, it’s completely safe, right?
In a nutshell, deposit insurance protects customers funds in the event of a failed financial firm, such as your standard bank accounts. These are common across many countries to enhance financial security and provide a safety net for financial stability.
What this means for you is preventing loss of your funds if your bank fails…but by all means not all of it. Some of your savings are preserved up to the threshold, which differs by country – for example:
Money above this figure is not guaranteed, simply meaning that any savings above the limit are at risk of complete loss if the financial institution fails. It is worth checking what the bank insurance limit is in your country so that you can plan accordingly.
For example, some countries may offer this limit per account, so that you can spread out any wealth above this figure between different institutions…however, if you’re stashing large amounts of money away at these limits, whilst obtaining meagre savings rates and not actually needing the funds, is it not better put to use elsewhere?
Tie this in with inflation. In the UK, for example, the insurance limit is £85,000. Ask yourself if you really need all of that sitting in your bank, where it is earning low savings rates and at the risk of inflation as mentioned above. Chances are for your Average Joe, you don’t! And leaving it sitting there is doing nothing for you.
