Overview:
Everyone in this world, at least we, human beings, have to earn money to survive in our lives. People have been in the most difficult jobs under ironclad management to make very little money. In poor and developing countries, workers sacrifice necessities like toilets and food facilities to earn their livelihood. Regardless of all the hard-work and endurance, we can do only two things with our hard-earned money.
- Spend it for today’s survival
- Save it for future survival
In India, people give utmost importance to their savings. An average household saves around 25% of their income in my state. But savings is a luxury for more than 70 crores (or 700 million) poor people in India. Mostly, people of other South Asian countries also save a considerable part of their earnings. Basically, savings and economies are directly related together in the developing nations.
In western countries like the US and European countries, people do not save as much as in Asian countries. There is absolutely nothing wrong with that since their economic and financial conditions are different.
Concept of Modern Money:
Most of us lack the faintest idea of the difference between money and wealth. Ever since my childhood, I had been always curious since there are so many poor people in India, why don’t the government print money and distribute money to all those people?
Nevertheless, I realized that it can’t be done that easily and that’s not how much a national financial system works. It took me over ten years to get to a conclusion. It felt like I understood at least some part of how a financial system works.
But now, the US government printing trillions of dollars, buying bad debt of the companies hit my idea of money so hard that I feel concussed now. I am one of those few idiots who can’t understand why the stock markets are skyrocketing despite a significant decline in the global economy.
The monetary system we follow today is of Fiat Currency. I have described it in the article Evolution of today’s money. Printing and distributing money may provide some relief in these distressing times of Covid-19. But this humungous extent of money printing is certainly alarming.
The more money created artificially demands the creation of even more money. This results in Hyper Inflation, a situation where there is too much money for limited goods and services. It results in the devaluation of the currency.
Generally, wealth creation depends on the level of productivity. The nations and their economies prosper not because of creating paper currency but with improvement in the productivity and living conditions for the citizens.
Saving Money in the Banks:
You might be confused about what does the printing of money has anything to do with saving money in the banks. First, we should understand why the banks pay interest on your savings. In India, there are mainly two types of deposits.
- Savings Accounts
- Fixed or Term Deposits
In savings accounts, the banks provide low-interest rates. As of now, major banks pay around 3% per annum in India. We have high liquidity in these accounts as we can withdraw our money whenever possible.
In fixed or term deposits, the bank locks the money for a certain period. The customer can’t withdraw the money during that period. To withdraw money, the customer has to cancel the deposit. Because of low liquidity, the interest rate on fixed deposits is higher. It is around 5.5% to 6% now.
Why do banks pay high-interest rates on fixed deposits?
Banks’ principle of working is very complex. It is very difficult to explain in a single article. I will make it simple for you. Banks use the money deposited by their customers for lending and investing purposes. Usually, banks collect more interest from the loan takers and pay lesser interest to their customers.
For instance, in India, a personal loan for a salaried person has a 12% minimum interest rate. It shoots up to 18% or more for self-employed or small business people. Do the math for yourselves, banks lend the money for 12% to 18% but pay 6% as an interest to customers. It’s how banks earn income.
Banks should not use the money in the savings accounts for aggressive investing or lending. Therefore, the interest rate is low on savings.
Why you shouldn’t save all your money in a Bank?
Inflation is the first reason. In India, the average inflation rate hovers around 6% to 7% in a year. If you feel your money is safe in the bank that pays a 6% interest rate, congrats for losing 1% of the hard-earned money to inflation. That being said, we should possess a minimum of one year expenses in cash.
Devaluation of currency is another cause. Printing more money, providing moratorium, and loan benefits to corporations are good for the revival of the economy. But excessive measures like these reduce the value of our currency.
We all have experienced an increase in prices of essential commodities like rice, wheat, pulses, oil, etc. It is the direct result of inflation and currency devaluation.
Other possible savings and investments:
It is a relatively simple concept. Never put all your eggs in a single basket. Diversify your investment across equity, stocks and mutual funds, debt bonds. The precious metals like gold and silver also make good investment opportunities backed by their exclusive intrinsic value. If you are rich, you can invest in real estate and some start-ups.
Note:
I provide the information and my views on the website only to educate new investors, stock market enthusiasts, and the common public on equity or stock market investments. Please consult your financial adviser before making any investments in the stock market. In case of any queries, you can contact me via email ID: shivakumar.lachapeta@valueinvesting.online.
