A few days ago, a good friend of mine showed me his 7-figure savings bank account. (I was thinking, “Whoa!!!“) He had been saving up his long-term savings into it for quite some time not knowing what to do with it.
And the first thing I said was, “Sayang!!!“
And Here’s Why…
Banks are the most popular choice of many Filipinos for their long-term savings. They are everywhere and this makes depositing money in banks a convenient option. When I say “bank,” I’m referring to traditional bank products like savings accounts and time deposits. Savings accounts are among the most liquid investments you can make. The downside, however, are the yields. They are the safest options, but they give the lowest returns. The lower the risk, the lower the returns. Having low returns, especially if below inflation rates, will effectively reduce the value of your money in the long run.
Here’s the Shockingly Simple Truth of How Banks Work:
You deposit your money in a savings account. The bank will pay you interest for every peso you keep in your savings account. On average, most banks in the Philippines pay 0.25% interest per year to their depositors. Which means, if the bank is paying 0.25% interest, the bank will pay you Php 0.25 for every Php 100 you have in your account.
Why Does The Bank Pay You?
The bank wants to use your money to lend people or businesses money. Some examples are housing loans, auto loans, business loans, credit card loans and personal loans. On average, banking lending rates range from 5% to 50% interest per year.
Here’s An Example:
Paula deposits Php 100,000 into a savings account with ABC Bank that pays 0.25% interest per year. At the same time, Juan needs a Php 100,000 loan to buy a motorcycle. He goes to ABC bank for a loan, and the bank charges him 6% for the money.
By the end of the year, Juan pays the bank Php 6,000 in interest, while the bank pays Paula Php 250 in interest. Basically, ABC bank made Php 5,750 by loaning money – even after paying Php 250 interest.
If you were Paula, are you content with earning less than 1% while the bank earns more than 5% from using your money? If YES, you must be stupid! If NO, you’re on the right track to being financially smart.
What Should You Do With Your Savings Account Money?
If you have money in a savings account and are reading this article, you’re probably disappointed in the 1% (or so) return you’re getting lately. Surely you can do better than that?
If the money in your savings account is your emergency fund, just leave it as it is. You should have immediate access to it in case of an emergency. But if you want to see growth, find a savings account with a higher interest rate or place it in a money market account.
Otherwise, your best option is probably to put your long-term money in mutual funds or in the stock market (where you can indirectly buy the bank). Other than mutual funds being offered by insurance companies, banks today also offer similar products like unit investment trust funds.
Savings accounts are the least risky type of investment, and it is generally recommended you keep some of your money in these assets. But investing in shares gives your money the chance to earn better returns than it would if you left it in a bank account.
photo credit: Historic Sanctuary of Machu Picchu via photopin (license)