Maximize Earning Potential through Savings Accounts Interest

2007-03-08 10:33:40

( Financial )



You may think that the meager savings accounts interest that some of the banks provide ensures that your money will not depreciate in value in the years to come. That is not quite always true. The truth is that the savings accounts interest that some of the banks give you will actually make you lose money in the long run.

How can that be? You may very well ask. Well here’s a simple lesson on how your money behaves in a savings account. A hundred dollars in your savings deposited a year ago would increase a little bit depending on the accounts interest of the bank. Say the bank told you that the interest rates for savings accounts opened in their bank would earn you an interest of three percent per annum. This means that your hundred dollars a year ago would become a hundred and three dollars today because of the three percent savings accounts interest.

Well and good you might say. The amount of money in your savings account has indeed increased, and this is precisely what other people see (and what the banks hope you would see). What you failed to consider, however, is the difference in value of the dollar from last year and now. Prices of commodities go up every year as with almost everything else. Your hundred dollars last year would actually buy more than it would this year. This is called the decreasing buying power of the dollar or in layman’s terms, inflation measured in what we call the inflation rate.

So say the inflation rate of the past year is 7%. What this actually means to you is that your hundred dollars has lost 7% of its value. Your hundred dollars now would only be able to buy what 93 dollars last year could. Add the three percent savings accounts interest you have earned from your bank and your hundred dollars is comparable to 96 dollars last year. So, not only have you not made any money on the deal, you’ve actually lost some of it.

So a rule of thumb in saving money in savings accounts is you must always look for high interest accounts particularly those which offer interest on savings accounts equal to or higher than the inflation rate. High interest rate accounts would not only safeguard your money from thieves or robbers, it would also protect it against inflation.


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