Updated: November 28, 2021
A lot of people believe that putting money in the bank is risk-free. They’re just happy to receive interest on their deposits and watch their money grow.
But because of inflation, what they don’t realize is that they’re actually losing money by leaving their cash in the bank for many years.
How? Consider the illustration below.
The Price of Rice
In 2004, the price per kilo of regular milled rice in Metro Manila is P18.63. This means if you had P10,000 back then, you could buy 536.77 kilograms of rice.
In 2014, after 10 years, the price per kilo of this commodity in Metro Manila is now P36.00. So how many kilograms of rice can you afford today, if you simply placed that P10,000 in a savings account for 10 years?
According to historical data, bank deposit interest rates back in 2004 were 6.18% per annum (which is higher than what I remember). Assuming your money enjoyed that rate for 10 years, and all the interest earned was tax-free, then here’s how you lose money.
As you can see, you can now afford less rice, 30.80 kilos less to be exact. Multiply that by the current price and we can say that you just lost P1,108.75 (30.80 kgs x P36.00).
Do you still think your money in the bank is risk-free?
How To Not Lose Money
To best way to not lose money is to put it in an investment that earns more than the inflation rate over the long term. There are many of them out there, but let’s pick a specific one for purposes of illustration.
In January 2004, the Net Asset Value per Unit (NAVPU) of BDO’s Peso Balanced Fund was 1,124.5934. If you invested that P10,000 back then, you’ll have 8.8921 units of participation.
In January 2014, the NAVPU of BDO’s Peso Balanced Fund was 3,443.7508. If you redeemed your investment during that time, you would receive P30,622.19 (computed by multiplying 8.8921 units by 3,443.7508).
How many kilos of rice can you buy with that much money today? The answer is 850.62 kilos of rice or 58.47% more than you could afford 10 years ago!
So Savings Accounts Are Useless?
Now, don’t withdraw all your money from the bank!
Savings accounts and time deposits are not useless because they have their own purpose in your financial plan.
It’s a great place to put your emergency fund, along with the money that you plan to spend in the next 2 years.
For the money that you plan to use in the future, say three or more years from now, such as your retirement fund – then the best place to put them is in an investment.
Cereals: Retail Prices, Philippine Statistics Authority
Philippines – Deposit Interest Rate, Index Mundi
UITF Yield Calculator, BDO Unibank Inc.
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What do you think about BPIs savings account which provides you 5x the amount in the account upon time of death (up to 2M)? I am currently ‘shifting’ my mid-term E-fund and immediate savings there because of this with the plan of having multiple accounts in the next 18-30 months. It would still be far fetched since I (sincerely) hope not to die sooner, but would like to get your thoughts. 🙂
Hi R1A, the BPI Save-Up Automatic Savings + Insurance is a good product because it’s an automatic savings plan with term life insurance benefits. But again, this should just be for your EF and 2-year spending budget, and no need to have multiple accounts of this same type.
Savings accounts are just for emergency money. Always go for investments such as UITF as mentioned in the post. I love BDO, kasi pwede pakonte konte. As low as 1k a month
Hello,I have an investment account and a savings account. I religiously add to both every month. The investment has been performing great, while the savings is pretty much as is.
Do you think it’s okay have a fixed savings goal instead, and focus on investing more? Say fixed savings of 100k. If it goes beyond 100k, i’ll transfer the excess to my investment account? Or would you recommend growing both investment and savings at the same time? My goal is to have enough funds to retire / venture into business after 10-15 years.
What is the best investment plan for BPI or BDO as starters? Ty
Hi Deo, go to your bank, answer their Investor Risk Assessment test, and they can recommend to you appropriate investments.
Hi Fitz, would you be so dear to ask Rap’s question as it’s quite similar to my concern as well 🙂
Hi Rap and Inghinyero…
Your savings should have a limit – which is your emergency fund. Anything beyond that should be invested.
Your emergency fund should at least be 6 months of your monthly expenses. If you spend P30,000 a month, then your EF should at least be P180,000 – and that’s your maximum amount that you keep in your savings account. All else should be invested.
What should comes first, savings account or investment? TIA
[…] inflation? By not investing, you are actually losing money – and that’s something you should be afraid […]
Khen…savings account should come first for your emergency fund (atleast 3-6 months of your expenses), after setting up your emergency fund, buy insurance (life/health) as part of risk management coz once you have peace of mind for contingencies, the purpose for investing won’t be defeated. Then,open an investment account. either a VUL (protection money+investment), Mutual fund, Uitf, or a trading account if you wanna invest directly in the stock market.
[…] they don’t know is that because of inflation, they’re actually losing money by not investing. The Philippines’ average inflation […]
My view is that central banking/ federal reserve systems/fiat currencies are the real enemy. Because of these systems, any nations currency can be manipulated at will by the banksters. Need to pay a bill, just print more money. However, the currency you hold is devalued because there is more of it. I will share an old story: At one time a man could purchase a fine suit, including a vest and two pair of pants with a single one ounce $10.00 USD gold coin. These days, $10.00 USD (about P500) may not even get you a shirt at the local mall. However, if you still had a $10.00 one ounce gold coin today, I dare say that you could certainly purchase a top shelf suit and all the extras if the gold were converted to paper money. I am not a “gold bug” but I think we can all agree that solid gold is a store of wealth.