Many experts believe opening a savings account is one of the first essential steps towards financial well-being. Savings accounts offer capital safety, stable interest earnings, easy liquidity for everyday transactions, and urgent cash requirements. While no one can deny the importance of such accounts in terms of inculcating fiscal discipline, savings accounts don’t really save your money. The modest interest rates of a savings account often fall short of inflation, leading to a gradual erosion of your savings’ purchasing power. This article highlights why your savings account is not saving your money in detail to help you draft a strong fiscal plan.

• Savings accounts offer low returns.
  

• Parking surplus in savings accounts results in opportunity cost because investors miss out on better returns from investments.

• Nominal savings returns cannot keep pace with inflation, resulting in the loss of purchasing power.

Here’s a list of reasons why your savings account may not be saving your money:
 

Low returns

Savings accounts offer nominal rates of interest on the saved corpus. Generally, savings account interest rates range from 2.5%-3%. This limited interest yield makes savings accounts not a good option for those who wish to fulfil the goal of wealth creation.
 

Opportunity cost

By keeping your saved funds in a savings account with lower yields, you might be missing out on investment opportunities that could offer potentially higher returns. This is another reason why your savings account may not be saving your money. Savings accounts generally have minimum balance requirements, which means you must divert funds to meet these requirements instead of investing them in liquid funds or other avenues to earn higher returns.
 

Loss of purchasing power

Keeping your surplus funds stored away in a savings account may offer capital safety, but inflation can erode the value of the stored funds over time. As inflation rises, the purchasing power of your savings diminishes, meaning the same amount of money buys less in the future. In simple words, the low interest rates of a savings account cannot outpace inflation, resulting in the gradual loss of value. This is another way your savings account is not actually saving your money.
 

Forfeiture of tax benefits

Capitalising on tax benefits is one of the best ways to save money. However, savings accounts do not offer many tax benefits. In India, you can claim a tax deduction of up to Rs. 10,000 on the interest earned in a savings account u/s 80TTA of the Income Tax Act. Investing your surplus in tax-efficient instruments like 5-year FDs, PPF, and NPS may be better for maximising tax benefits.

Now that you understand that your savings account is not really saving your money, you can instead opt to invest your surplus funds. While savings are safer than investing, they do not result in wealth creation over the long term. If you invest your corpus, you can enjoy the following benefits:

• Investments work on the principle of compounding and reinvesting to bring you a better potential for higher returns. In simple words, investing can help you grow your wealth over time and achieve long-term financial goals like planning for retirement and buying a home.

• Contrary to popular belief, not all investment products come with mandatory lock-in periods and limited liquidity. Investment instruments like liquid mutual funds and ETFs offer easy liquidity to investors who wish to redeem their corpus at any given time to meet financial emergencies.

• Lastly, curating a diversified portfolio of stocks, mutual funds, ETFs, gold, and other assets allows you to capitalise on both tax benefits and inflation-beating returns. Diversification helps mitigate investment risk, while allowing you to optimise returns from various asset classes to ensure zero purchasing power compromises.

In a nutshell, a savings account offers a liquid safety net but does not really save or grow your money. High-yield savings accounts work great as a repository of your emergency funds or when you need the saved corpus in the next few years. However, if your aim is to build long-term wealth, investing your corpus is a better option. The key is to espouse a balanced approach, where you have emergency reserves in savings accounts and invest the rest to capitalise on tax and return benefits.