Ashish is a successful executive at an IT MNC firm. Last year, he received a bonus of Rs 5 lakhs. He was elated because his ‘bank balance’ finally crossed Rs 10 lakhs. Thinking he would ‘do something’ with the money, he promptly forgot about it till he got an sms from his bank with a message saying, “Rs 30,264 has been credited to your account as interest”.
He was pleasantly surprised and happily told his friend Rohit about how he had ‘earned’ Rs 30k without doing anything. Rohit who had recently attended a workshop on Personal Finance and was getting a personalised Financial Plan done, told him that he had actually lost money by keeping Rs 10, lakhs in a savings account in the bank.
Here is how Ashish’s money went up in smoke over the course of a year.
- When you leave money in a savings account, the bank usually pays you an interest of 4% per annum. Plus, when they pay out the interest, they deduct TDS on it and and the entire interest component is part of your taxable income.
Inflation in India is currently in the range of 9 – 10% : What this in very simple terms, means that every year, the cost of goods goes up by 9 %. e.g. if you can buy 1 kg of vegetables for Rs 100, this year, it will cost you Rs 109 next year.
So essentially, the value of your money decreases year on year, just due to inflation.
Getting back, to Ashish, while his Rs 10 lakhs grew by roughly 4%, they also decreased in value by 9% leaving him with a net loss of 5%.
Even if he had deposited it in a Fixed Deposit with a rate of 8 %, his net loss would have been 1%.
So while Ashish was feeling very good and secure with having a ‘millionaire’ bank account, a part of his money had actually gone up in smoke.
What could Ashish have done to prevent this ?
There is no simple answer as it depends on a lot of factors including a person’s risk profile, his current needs, liabilities and various other factors. However, if he had planned financially, and got a personalised financial plan, then he would have been more aware of his requirements and planned for adequate liquidity, while gainfully deploying his funds with higher returns.
Unfortunately, we aren’t really taught to manage our money well, either in school or college and most of us realise it only very late in life.
At Finqa, we help people invest and grow their money better. Talk to Us.