During the 2008 financial crisis, a friend of mine pulled all of his money out of stocks and put it in the bank. Spooked by crazy markets, he decided the safest place to stick his money was in a nice tidy savings account. He was actually kind of smug about it — “nothing is safer than putting your money in the bank,” he declared.
Well, actually he was wrong. Letting your savings sit around in a low-interest bank account isn’t a good thing to do if you’re saving for a long-term goal, such as retirement. In fact, it will eat into your savings. Why? Because of inflation — the rise in the cost of goods and services over time. It’s a savings killer because it eats away at the value of your money year after year.
Inflation is why your kids would laugh at you if you tried to give them the same weekly allowance you got when you were 10 years old — two bucks just won’t buy anything anymore.
Let me show you just how much inflation (combined with a low-interest rate in your savings account) can bite into your nest egg:
My savings account currently offers an annual interest rate of 0.75 per cent if (and only if!) I maintain a balance of more than $5,000. Big wow, eh?
Assuming I go this route, in 10 years, my $5,000 would be worth $5,387.91. Not great, right? It gets worse. Add in three per cent inflation and I will lose money, with my savings shrinking down to $3,973.18.
That’s a loss of more than a thousand bucks in 10 years!
Still think putting your money in a bank savings account is safer than investing in stocks or other higher-yielding investments? Well, at least take the time to make sure you’re getting a decent interest rate, which can vary from bank to bank. The Financial Consumer Agency of Canada has a great tool that can help you find the best savings account. You can find it right here.