Why Your Savings Account is not Safe for Your Long Term Goals

I'll ask you this: Do you have dreams in the future? Like a car, a house, proper education for your kids in college, travel around the world, or a helicopter equipped with laser cannons and gatling guns.

Now, unless you won your dreams in a contest or someone really generous gave it to you, you will never get it instantly. You'll probably have to wait for years before you get the amount of money for your dreams. A lot of people would actually save that money in a savings account because it's "safer" than putting it in investments. I would agree that it is safe to put your money in a savings account ONLY if it's for your short-term goals (like a year or less). Now for long-term (5 years and more) and medium-term goals (3-5 years), and (I can't emphasize this enough) YOU WILL LOSE MONEY!

But why?

Well, subheader. I will tell you two enemies that will stand and hinder your finances.

First Enemy: Taxation

If you have a savings account, you are well aware of the 20% withholding tax looming in your bank account. If you don't have a savings account, seriously? You don't have one? Go get one now!

Of course, your savings account has interest (depends on the bank but it's usually around 1% or less) but that interest is deducted by that 20%. I'll show you an illustration which will involve me doing what I'm allergic in doing: MATH.

For example, you have Php 100,000 for your son's college tuition who's still in grade 6 and you put in a savings account with 1% interest per annum (for examples sake).

Php 100,000 x .01 = 1000

You have earned 1,000 pesos. Now let's tax it.
Php 1000 x .20 = 200
Php 1000 - 200 = 800
Php 100,000 + 800 = 100,800
That's what you've earned. Next comes the worst enemy of all.

Second Enemy: Inflation

Inflation (if you forgot about your Taxation class in college and Economics class in high school) is the increase of prices of goods and services in a given economy for a period of time. Basically the one responsible for the increase of prices in your favorite restaurant, why rice gets expensive over the years, and why a liter of coke 5 years ago was just 22 pesos but now it's 27.

How does this affect me?
Well, sub-header, if you must insist. I have to do MATH again.

Let's use Php 100,000 again, but this time with the inflation rate of 6% a year (based on the estimate of the Philippine's inflation rate for the last 10 years).

Php 100,000 x .06 = 6,000
Php 100,000 + 6,000 = 106,000
Now let's pair it with your money in your bank account.
Money in the bank after a year = Php 100,800
Money value of 100,000 after a year = Php 106,000

There is a large amount of discrepancy between the two in just a year. Your money's purchasing power (the value of a sum of money) lowers, and whatever you can buy with your 100,000 last year cannot be purchased this year.

If for example you want to buy a car but your money isn't enough yet so you save it for five years in the bank. What would happen in five years? (I have to do MATH again... sheesh.)

I'll just simplify the equation for this one so I won't include the deduction of tax.

1%-6%= -5%

Php 100,000 x -5% = -5,000
Php 100,000 - 5000 = 95,000 Purchasing power of your money in the first year.

Php 95,000 x -5% = -4,750
Php 95,000 - 4750 = 90,250 Purchasing power of your money in the second year.

Php 90,250 x -5% = -4,511
Php 90,250 - 4513 = 85,737 Purchasing power of your money in the third year

Php 85,737 x -5% = -4,287
Php 85,737 - 4,287 = 81,450 Purchasing power of your money in the fourth year

Php 81,450 x -5% =  -4,073
Php 81,450 - 4,073 = 77,377 Purchasing power of your money in the fifth year

Your money's purchasing power is deducted and won't be of no use for that new car that you really want, your kid's college education, your dream house, or that helicopter with laser cannons and gatling guns.

But what should I do?

Don't worry sub-header. There's a way. It's called INVESTMENT. On my next post I'll tell you about how to invest.