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Your Savings Account can Make you Rich – or Poor.

Banking

Your Savings Account can Make you Rich – or Poor.

Savings accounts offer interest to the account owner which is paid periodically. This interest is expected to compensate the depositor for the forgone liquidity and time. For some, savings accounts are a means to riches. They work hard only to deposit their unspent funds in their savings account. Whether or not this practice will accumulate enough funds and make you rich over a long period is the focus of this article.

Interest Rate on Savings Accounts

In Ghana and most African countries the interest rate on savings account is usually higher, nominally, than rates offered in the Americas and Europe. It is however below the risk-free rate most of the time. The risk-free rate is equivalent to the treasury bills rate.

Interest on Savings vs Treasury Bills Rate

If your government is borrowing for 3-months at a say 20% and your bank is offering you 12% on your savings account, then you can see what you’re ‘losing’. But mind you, the savings account allows you to make withdrawals and deposits within this 3-month period, unlike investment in T-bills, and so it is quite understandable if your bank doesn’t offer you rate equal to or above that of the treasury bills rate. That makes treasury bills rate and savings account somewhat an unfair comparison. So what exactly can you compare this to? I say, the inflation rate. A savings account worth signing up to must at least offer holders a return equal to or above the inflation rate. This would compensate holders for time and rising prices.

Long Term Impact

Continuously enjoying this seemingly high rate on investment may not pay off in the long-run. Savings accounts pay you something really small, in comparison with risk-free rate (the minimum expected on investments in the country). In the long term, accumulating returns below major benchmarks especially the risk-free rate and inflation rate will leave you with amount bigger than what you have invested, BUT in real terms this may not be able to buy you the same quantity of commodities that your initial investment would have been able to buy at the time of investment. Simply because of inflation. If inflation is higher than the interest you are getting on your savings account, then it will eat away all your interest and part of your initial investment as well.

Alternatives Available

I do not advise people who are seeking to invest their money to place it in savings account. No. Savings account is meant to encourage people to save money. It is not an investment option for me. If you are afraid to take risks with your money, you may look at investment options like treasury bills and fixed deposits (or term deposit). However, for those who are willing to take some appreciable level of risk to earn above-market returns, you may look to the stock exchange, mutual funds and taking stakes in other profitable businesses in the country.

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  1. Pingback: The Value of a Coin: The Way to Financial Freedom - Top Business Journal

  2. Pingback: 4 Smart Money Habits to Help You Earn Your First Million Dollars

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