The Truth About Saving In Banks

We go through school, some of us have even been to a finance or economics class. However, our school systems only teach us how to work for money and barely teach us anything about the money that we are taught to work for.

That being said, did you know that putting your money in the bank is not a safe investment as you thought?

In this article I'll tell you why.

Prices of various products are steadily increasing making the amount of money we need to buy a product progressively more. This is called inflation.

The average global inflation rate is around 4%. This rate may be way lower or higher depending on the country in question.

In Kenya, which is a developing country, the average inflation rate as provided by the Kenya National Bureau of Statistics for the year October 2016-September 2017 was 8.3975%.

Now here is what will shock you, in the same country, a popular bank, National Bank offers an interest rate of up to 5.5% p.a on savings. Most other banks have almost the same interest rate.

This means that if you save $ 1,000,000 with the bank, at the end of the year, your 'safe investment', the bank will add the interest on savings to your $ 1,000,000 and your money will now be
$1,000,000+$55,000= $1,055,000.

Wooah! Earning $55,000 in an year without doing anything!!! This looks like an impressively good deal until you take a real life application of inflation.

Assuming there's a house that you wanted to buy that costs $1,000,000 at the beginning of the year.
At the end of the same year, charging the inflation rate above to the house, the house now costs $1,083,975.

If you had saved the $1,000,000 in the bank, at the end of the year your money would accrue to $1,055,000

This means that while you intended to save, you have actually lost $28,975 (1,083,975-$1,055,000) to inflation.

This also means that the money, $1,000,000, that you could have afforded to buy the house at the beginning of the year with can no longer buy you the same house. You need to add an additional $28,975 to afford the same house.

Now this is knowledge that they don't teach at school; that most inflation rates are higher than the bank interest rates.

NOTE I'm not saying that it is a bad idea to put your money in the bank. Saving in the bank to hit a certain target amount is totally okay.

What I'm saying is that banks are not the place you should expect to grow your money.

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