Saving Is Not The Same As Investing: Inflation The Mortal Enemy Of Saved Funds In Bank Accounts

By Steve Biko Wafula / Published March 22, 2023 | 10:24 am

KEY POINTS

KEY TAKEAWAYS

If someone saves $10,000 in a bank account with a 1% interest rate and an inflation rate of 2%, their savings will lose value in real terms.

In this scenario, after one year, the $10,000 will only have a purchasing power of $9,800. This means that the money saved has effectively lost $200 in value due to inflation, even though it earned some interest.

Saving money in a bank account and investing are not the same things, as they serve different purposes and offer different potential outcomes.

Saving is simply putting money aside for future use, typically in a low-risk account like a savings account, whereas investing involves using that money to generate a return, often through purchasing stocks, bonds, or other securities.

One of the main reasons why inflation is such a mortal enemy of savings is that it can erode the value of saved money over time. For example, if someone saves $10,000 in a bank account with a 1% interest rate and an inflation rate of 2%, their savings will lose value in real terms. In this scenario, after one year, the $10,000 will only have a purchasing power of $9,800. This means that the money saved has effectively lost $200 in value due to inflation, even though it earned some interest.

Inflation is especially bad for saved money in bank accounts because the interest rates on these accounts are typically much lower than the rate of inflation. This means that even if the savings account is earning some interest, the rate may not be high enough to keep pace with inflation. As a result, the savings will effectively lose value over time, as the purchasing power of the money decreases.

Furthermore, saving money in a bank account may not provide the same potential for long-term growth as investing. For example, investing in the stock market has historically provided a higher return on investment over the long term than saving money in a bank account. While investing comes with a higher level of risk, it also has the potential for greater rewards over time.

Another disadvantage of saving money in a bank account is that the interest earned is typically subject to taxation. This means that the actual return on investment may be even lower than the stated interest rate. In contrast, some investments, such as certain types of retirement accounts or municipal bonds, offer tax advantages that can help to maximize returns.

Saving money in a bank account can be a good strategy for short-term goals, such as creating an emergency fund or saving for a specific purchase. However, for long-term wealth creation, investing may be a better option, as it offers the potential for greater returns over time. Investing also provides the opportunity to diversify a portfolio and manage risk, which can help to minimize losses during periods of market volatility.

Finally, it is important to note that savings accounts are typically insured by the government up to a certain amount, while investments are not. This means that savings accounts provide a higher level of safety and security than some investment options, which can be subject to fluctuations and even losses.

In conclusion, saving money in a bank account and investing are not the same things. While saving offers a low-risk way to store money for short-term goals, investing offers the potential for greater returns over the long term. Inflation is a mortal enemy of savings because it can erode the value of saved money over time. This is because the interest rates on savings accounts are typically lower than the rate of inflation. Therefore, it is important to consider investing as a potential strategy for long-term wealth creation, as it offers the potential for higher returns and the ability to manage risk through diversification.

About Steve Biko Wafula

Steve Biko is the CEO OF Soko Directory and the founder of Hidalgo Group of Companies. Steve is currently developing his career in law, finance, entrepreneurship and digital consultancy; and has been implementing consultancy assignments for client organizations comprising of trainings besides capacity building in entrepreneurial matters.He can be reached on: +254 20 510 1124 or Email: info@sokodirectory.com

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