For most individuals, the security of being able to regularly check their savings account balance on their bank app or on a passbook is very high. Just knowing that the money is available, if and when they need it is very important for them. Little do they know that this money lying idle is doing more harm to them than good. We shall tell you some interesting reasons why you must not leave idle cash in your bank account.
Reasons for not leaving idle cash in your savings bank account:
- Your savings account takes more than it gives – Unbelievable!! Right? Do you know that inflation eats into the interest that you get? The issue is this is not visible to a naked eye but let me try and explain this in a simple language. People are always complaining that the prices of commodities are rising, and things are getting expensive. Inflation is a measure of the change in prices. You would have read in news articles that inflation is now at 5.5% or 6%. In basic language, this means that things are getting expensive by approx. 6% each year. Therefore, if some item was available at Rs. 100 last year, it would be priced at Rs. 106 this year.
Now let’s compare this to the average interest in a savings bank account. Normally, in a savings bank account, you earn an interest rate of 3-4% per year. So, if you had kept Rs. 100 in a savings account, its value today would have been Rs. 104.
Now compare this to inflation. You made 4 rupees on your money but whatever you are going to buy is now 6 rupees more expensive. This is known as a negative real return, when the return is less than the rate of inflation. This is the case most of the time with interest on savings accounts. I’m sure you must be already wondering if you should leave money in a savings account.
- Tax on a savings account – Interest up to Rs. 10,000 from savings accounts or bank deposits is tax-free under section 80TTA of the Income-tax Act. But if you are holding high sums in bank deposits, Rs. 10,000 is not a very big amount of interest from bank deposits. Any interest that you earn over this amount is taxable at the rate of your tax slab. Assuming a person falls in the highest tax bracket, the tax rate is 30%. Now let’s go back to the first example of inflation. If you are earning Rs. 4 on a deposit of Rs. 100 in a year, you also must pay 30% tax on the Rs. 4. So now your earning is only Rs. 2.80 (Rs. 4 – Rs. 1.20). Now compare this with the inflation rate of 6% and ask yourself “should I leave my money in a savings account?”.
- Uncontrolled Expenses – Have you noticed how when your salary comes in, life seems so comfortable? You tend to splurge by ordering through Zomato or Swiggy. Or you prefer taking an uber to work instead of the regular auto rickshaw or metro. But by the time you are getting to the end of the month, suddenly life gets difficult, but you somehow manage to scrape through till the next payday. You suddenly do fine without the home deliveries or comfortable airconditioned rides too.
Well, they say that like water, money tends to find a flow. If you have idle cash lying in your bank you will somehow find a way to spend it. If you are disciplined and do manage to put a lot together, the chances are you will happen to take that ‘not-so-needed’ vacation. The more important long-term goals such as saving for children’s education or retirement seem too distant. Well, time flies and you need to think about these goals now. Try to remember moments from your life that happened 10 or 20 years ago. It doesn’t seem that long ago anymore does it. Do you still want to keep money in your savings account?
I am quite sure by now you have decided that you are not going to leave more than your emergency fund requirement in your savings account. So now you need to know what the better options for your money are.
Set your financial goals
The first step in deciding where to park your money is to put a financial plan in place. To do this you would need to:
- Set out your goals
- Short terms such as vacation or education
- Long Term such as children’s education or retirement (YES!! Retirement. Even if you are only 25 and just starting your career).
- Assess your risk profile
- Do you have dependents?
- Could you need the money in an emergency?
- Are you okay with volatility in returns? Or will you lose sleep?
- Check how much you need to invest periodically
- What is your income? Is it stable?
- What are your expenses?
- Can you control some unwanted expenses?
Depending on the above you could choose from the following popular products (and many more):
- Equity – Highly risky, but potential to give the highest returns over the long term. However, one must have a good understanding and capability of selecting stocks.
- Equity Mutual Funds – Even though equity mutual funds are considered risky, they are less risky than investing directly inequities. The expected returns from mutual funds are almost like the returns expected from direct equities (the difference being a small management fee charged by the fund house. This is suitable for investors who are looking for high returns, but wither do not have the knowledge or time to carry out the research.
- Debt Mutual Funds – Debt funds invest in fixed income instruments such as government bonds, corporate bonds, fixed deposits, and commercial papers. These funds are considered much safer than equity funds. However, the expected returns from these funds are much lower than from equity funds.
- Liquid Funds – One of the best places to park your surplus funds. As a rule, one must always look to keep approx. 4 to 6 months of expected expenses in liquid funds. These funds offer a much higher rate of return as compared to savings accounts and are considered highly safe. Another advantage of liquid funds is that they are very liquid and do not carry any exit load.