When talking about savings, I somehow cannot get a particular image out of my mind. I don’t know if you’ve heard this story but the image that comes to mind is of an old man digging a hole in his backyard and placing a large coffee can in it. The coffee can contains money – his life savings. In fact, he has more than one coffee can. He has lots of them and all of them are full of money. His backyard is a veritable treasure trove!

My parents taught me the value of saving early on. As a child, I had my own junior savings account in our local bank. They dissuaded me from spending all of my allowance and they dissuaded me from merely hoarding it at home – much like the old man and his coffee cans. The rationale was that why keep the money stagnant when it can be just as safe in the bank and earn interest over time.

It made sense and it still does, actually. However, with the changing economic landscape, is it still safe to keep money in the bank? More so, is it profitable to keep money in the bank?

I think that the first question is easier to answer. More or less, yes, our savings are safe in the bank. This is especially true if we keep our money in a stable bank. Savings are also insured to a certain degree, so if anything happens to the bank, we can still have our money back – or at least part of it.

The second question, however, raises a whole lot of other questions. One thing is for certain, though. Interest rates are not that significant. On the other hand, the inflation rate is definitely going up. What are the implications of these facts?

Let us take a look at specific figures. Let us say that your bank’s interest rate for savings account is 6.4% per year – gross. The inflation rate, however, is about 4% per year. After taxes, your net returns would be 3.84%. This is obviously lower than the inflation rate. This simply means that your money is not worth what it was when you first put it in. In short, inflation eats away at the value of your money – if you keep it in the bank.

With these figures in mind, do you think that your money is safe in your savings account (of course taking into account both aspects – in terms of retrieving your money AND keeping its value intact)? I think not.

But what are you supposed to do with your money then? Should you just keep everything in coffee cans like that old man and bury them in your yard? Perhaps not – inflation will still catch up on your money and leave you with less than what you started with.

There are alternatives, however. So there is no need to despair. Perhaps in the next posts, we can look at alternatives to savings account as a means of saving your money and making it keep up with the inflation rate.