Why a Bank Savings Account Might Not Be the Safe Choice

Many people believe that keeping money in a bank savings account is the safest option because there is no risk of losing your money and you get steady (if small) growth. This assumption is often wrong because over the long term, leaving your hard earned money in low-return bank accounts can be a guaranteed way to become poorer. This is because inflation (continuous price increases), frequently exceeds the after-tax, after-bank fees return on your safe bank deposits.

Year 1: You start falling behind and are poorer.

You deposit R 100 into a savings/call account offering 10% p.a. This is called nominal interest. After one year you have earned R 10 interest, so your investment is now worth R 110. BUT you will will need to deduct tax and bank fees.

Assume a combined effective tax + bank fees of 50% on the interest earned (actual rates vary by tax bracket) so gross interest: R 10 - (Tax + bank fees) R 5 = Net interest is R 5.

‍Final amount at the end of year 1 = R 100 + R 10 nominal return – R 5 tax and bank fees = R 105. real return.

Now lets assume inflation is 10%, so the same basket of food that cost R 100 at the start of the year costs R 110 at year end, but you now only have R 105. You are getting poorer in real terms because the inflation rate (10%) is greater than your investment returns. (5%)

Year 2: You are getting poorer at a faster rate.

Now assume the inflation rate is still 10% p.a. so the cost of your original basket of food is now R 110 + 10% inflation, so it’s now R 110 + (R 110 x 10%) R 11 = R 121. It's now gone up by R 11 which is more than the R 10 increase in year 1 due to the compounding effect.

Your “Safe” R 105 investment in the bank however has only gone up 5% in real terms so your investment is now worth R 110.25 which is R 105 from year 1 + (R 105 x 5%) R 5.25 return in year 2.

You are now R 121 – R 110.250 = R 10.75 behind which is more than double the amount of year 1 (R 5) due to the compounding effect working against you.

Key Takeaway : A bank savings account is not a risk-free investment and investors get poorer if the inflation rate is greater than real returns.

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Practical lessons for building real long term wealth

1. Start investing today, no matter how small.

2. Stay invested because compounding rewards patience and consistency.

3. Aim for real returns above inflation. Anything less, and you are becoming poorer.

4. The difference between “saving” and “investing” is the difference between being poor or building lasting global wealth.

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