Why shouldn’t you put your hard earned money in long-term savings or time deposit accounts? Well it is mainly for three reasons, first is taxes, second is inflation and third is the itsy-bitsy teeny-weeny interest rates banks provide depositors. Legally speaking, depositors are not really depositors, they are lenders, and they lend money to banks. Passive incomes such as interest from bank deposits are subject to taxes. Depending on the tax law, sometimes people can get away with taxes, for those very long term time deposits, sometimes five years or more.
So why do people still use their savings and time deposit accounts for long-term needs? Well, others would probably say that they don’t know where else to put it and mostly would say because it preserves their capital or the money that will earn money. People sometimes would rather choose safety, less risks and low return over higher return and higher risks. As a general rule, higher return would equate to higher risk compared to a low return and low risk. And this is what banks deposits offer, a low risk with a low return. Sometimes people get easily influenced in investment scams because they are astonished and dumbfounded by high returns or the earnings that they will receive in such a very short period of time. More often than not, those with a high return and very low risk are investment scams. So before putting money in such investments, further study and research should be done.
For the “I will put my money for long-term purposes in the bank for safe keeping” kind of people, they probably still haven’t heard of inflation. Inflation eats up the value of their money. Yes it is much much..much less risky because the actual amount of money they put in there will still be there after one, two, three years or more but the value of the money is the one that gets lost because of inflation. Inflation is the decrease in the purchasing power of money. Let’s say that you’re in your teenage years and your mother always taught you the value of money and how to save for the future. You got your first job and earned a whopping $1,000 during school break. You then wrap it in a used newspaper, put it in a piggy bank, put the piggy bank in a vault with a security code that pentagon, CIA and the international police combined could not crack, dug a hole in your back yard and buried the vault there. And to make sure that not a soul figure out where you hid your precious treasure, you built a dog house and put “Fluffy” your guard dog on top of the spot. Twenty years later when “Fluffy” was not so fluffy anymore, you dug up the old $1,000 and with a smile saying “aww..your not lost..” hold it in your hand and went inside the house. While inside you heard in the news about the current prices of goods such as your favorite candy, tissue paper, a sack of rice, a pair of shoes, a bag of chocolate covered raisins, etc. everything was much costly than it used to be. You then looked at your $1,000 and realised that though your $1,000 is still physically $1,000, somehow you don’t seem to see its value the same as the value it has twenty years ago. It’s now, though still has value, is less valuable because you could have bought more goods before than now. That is the cause of inflation.
So the point is..lets build a time machine..errr..ahmm..going back, so if you’re going to put your savings in long-term deposits, make sure that the return you get will exceed inflation, if there is one, after considering taxes. For instance, if you’re neighbor is planning to put their money in a bank that
offers an interest rate of 3% a year, a tax rate of 20% and an inflation rate of 2.9%, then they will have…to get a good financial adviser..I mean, they’ll get a return of -0.5%. Better run to them quickly and shout in slow motion “Dooon’t dooo thaat!” How was it computed? 3% less 20% taxes equals 2.4% less an inflation rate of 2.9% equals -0.5%. The actual amount of money will be greater, but the purchasing power, or the power that money has to purchase (o gosh, so brilliant), of the money is 0.5% lesser.
For a clearer picture:
Cash deposit: $1,000
Interest earned: $24 [($1,000 x 3%) x (100% – 20%)]
Inflation: $29 ($1,000 x 2.9%)
Actual cash in bank: $1,024 ($1,000 + $24)
Value of cash in bank considering inflation: $995 ($1,000 + $24 – $29)
Banks are good, they keep money safe and well guarded, but putting money there for the long-term is not good. It is only good for short-term purposes like setting aside cash for emergencies or budgeting cash and allotting amounts for current expenses or bills that will be paid a month after. It is also good for money used in business where cash flows in and out of the bank for safeguarding and control of cash. Ever wonder what banks do with the money depositors lend to them? Banks use the money that people put in and invest it in different investment vehicles such as stocks, index funds, bonds, treasury notes, derivatives, real properties, loans, etc. so that they get a higher return that is enough to pay of interest that are due from bank deposits and other expenses and at the same time give them earnings. So why not do the same and learn from them, invests in different investment vehicles that works for you and get a higher return for the hard earned money that you have been sweating to take home and – let money work for you.
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