Does it still make sense to put money into a savings account?



If you are looking for a good way to save your hard-earned money, you will find numerous offers on the Internet, which promise you to manage your money in the best way possible.

At the same time you will probably find a lot of headlines on the web like this:

  • "Saving money is pointless!"
  • "Do You Think Saving Money Is Always Worth It?"
  • "Nearly all savings products fail to beat inflation!"

You might agree, all signs point in one direction at the moment: More inflation and rising uncertainty. Who knows if today's savings will have any value in the future? And what else can you get if the currency really should go down the drain once? History might repeat itself, the wealthy would make their friction and the ordinary people have to pay the bills with all their savings - again.

 

So let us take a deeper look at the sobering facts:

A recent survey showed, that while the vast majority of people (76%) say they want to save more money each month, the remaining consider savings accounts as "pointless" due to record low interest rates. And it’s easy to understand savers’ despondency.

Let's take the Bank of England as an example. The base rate fell to 0.25% in October 2017, after more than seven years at the then-record low of 0.5%. Meanwhile, the base rate bounced back to 0.75%.

According to figures released lately, the UK rate of inflation (CPI) rose to 2.3% in December 2018. However, an analysis of the standard savings account market by Moneyfacts.co.uk found that fewer than 1% of accounts pay an inflation-beating rate of interest, meaning that most savers’ cash is being eroded by inflation. Against this background, it is hardly surprising that so many people are losing their faith in banks and see little point in putting money aside.

Global inflation rate from 2012 to 2022

Source: statista.com

How does the Bank Rate influence your interest rates?

When it comes to saving money in a bank account, you have to understand one thing.

In the event that the bank rate changes, banks typically change their interest rates on saving and borrowing. But the bank rate is not the only thing that affects saving and lending interest rates. Interest rates may vary for other reasons and may not vary by the same amount as the Bank rate change. In order to cover their costs, banks have to pay less for savings than for loans. This means that when Bank Rate comes close to 0%, how far banks pass it on to lower saving and borrowing rates reduces. And as Bank Rate starts to rise away from close to 0%, that’s likely to lead to less of a rise in saving and borrowing rates.

Here you'll see an overview of the Top 10 savings rates in USD and EUR worldwide.

World Savings Rates | Top 10 in USD

Source:deposits.org

World Savings Rates | Top 10 in EUR

Source:deposits.org

In a nutshell, suppose that you have $100 in a savings account with an interest rate of 1%.
You'll have $101 on your account after a year. But if the rate of inflation is 2%, you would need $102 to have the same buying power as you started. You have a dollar, but you have lost the purchasing power. When your savings don't grow as quickly as prices increase, the value of money becomes less over time.

So here's the point, saving money for saving sake in a traditional way does not seem proper anymore. Savers bear the brunt of increased inflation. It would be more preferable to put aside some cash for a little while and then invest it, rather than having it in your saving account working for other people.

 

All of this might sound alarming - but there is hope on the horizon!

Make sure to find the answer in tomorrow’s article here and here !

 

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References:

https://20somethingfinance.com/a-personal-savings-rate-by-country-comparison/

https://www.financialsamurai.com/the-average-savings-rates-by-income-wealth-class/

https://www.deposits.org/savings-accounts.html

https://www.savethestudent.org/money/student-banking/best-student-savings-accounts.html

https://www.bankrate.com/banking/savings/rates/

https://www.worldatlas.com/articles/between-gross-income-and-expenditure-the-top-national-savings-worldwide.htm

https://www.gfmag.com/global-data/economic-data/916lqg-household-saving-rates

https://www.ft.com/content/c7176152-b50a-11e3-af92-00144feabdc0

https://www.cnbc.com/2018/07/26/77-percent-of-millennials-are-wrong-about-the-best-way-to-save.html

https://www.ft.com/content/187f74ac-bc0f-11e8-94b2-17176fbf93f5

https://www.statista.com/statistics/256598/global-inflation-rate-compared-to-previous-year/


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