Saturday, June 5, 2010

Money in the Bank. Save and Safe?


As soon as I left the Singapore Armed Forces, I started asking my friends around me a very "stupid and annoying" question as many may deem.

"so... what are you going to do with your money?"
The majority of replies I got was, "put in the bank la!"

I knew that wasn't the answer I was looking for. I began my search on this topic on "what-to-do-with-my-money". And I didn't find that answer, but instead, I found a more disturbing problem.

Take this situation.
You leave $100 in a savings account with a bank. The bank offers an interest rate of 4% per annum. Inflation is at 3% per annum. This leaves you with a positive figure of 1% per annum. Let's include government taxes at about 2%. This leaves you with a negative figure of -1% per annum. This simply means your spending power has been reduced to $99 instead. Yes, indeed by figures you have now $104, but you only have a spending power of $99!
Don't quite get it? Let me put it in another light.
Two men had intentions to buy a CK watch. The watch cost $1,000, and both men had $1,000 each. One of them decided to buy the watch now, the other decided to buy it 5 years later. 5 years later, the same watch cost $1,100. The man who bought the watch at $1,000 sold his watch at $1,100 and got himself another watch. The other man who didn't buy a watch initially, now can't afford a watch.
Don't get me wrong, I'm not asking you to spend all your money now. What I am implying, is that inflation and government taxes is a double whammy that will bring your spending power down. Let's start by doing a small reality check.
  •  A bank's savings interest is NOT 4%. DBS is currently offering a yearly interest of 0.25%. As per their website DBS Deposit Rates. This is correct as of 5/6/10.
  • Inflation rate was recorded as high as 7.5% in 2008!. Currently Singapore's inflation rate is at 3.2%. As per TradingEconomics website Singapore Inflation Rate
Uh-oh. What about fixed deposit? Surely that will make a difference?
Okay, let's do a quick reality check again.
  • OCBC has a timed-deposits account that promises a higher interest rate per annum rather than the ordinary savings account. You may put any amount of money of more than 5,000SGD for 36 months and enjoy an interest rate of 0.8%. As per their website OCBC Rates. This is correct as of 5/6/10.
0.8%... You still aren't beating or even curbing inflation. You are still losing money! Yes, you are losing your spending power just by leaving money in a bank! After discovering this, I made my mind to begin studying about investments. It is, no doubt, a very dark, scary step. But everyone starts off new. Warren Buffett wasn't a genius overnight. His hard work pays. Thus, by this, I'm very determined to educate myself more about investments, keeping up with daily news and of course, sharing this cold hard fact with any potential readers of my blog.

So, may I ask you this question then.

"What are you going to do with your money?"

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