For many cash-strapped South Africans who are just managing to save, the big question is still – am I saving enough?
Mellony Ramalho, African Bank’s Group Executive: Sales, Branch Network, says it is very important to save above inflation to avoid diluting the value of your money over time.
American President Ronald Reagan was once quoted as saying, “Inflation is as violent as a mugger, as frightening as an armed robber, and as deadly as a hit man.”
“We know that unfortunately most bank savings accounts are offering interest rates below the current July 2018 inflation rate of 5%. “If you look closely at some of the bigger banks you will also notice that their interest rates are linked to the balance in your account and this can be deceptive. The problem with this, is that you need to have a huge balance in your savings account before you can even start earning an interest rate which is above inflation. Sadly, for most South Africans this is not an option,” says Ramalho.
So, we know inflation is the rising price of goods and services over time. It’s an economics term that means you have to spend more each month or year to fill your petrol tank, buy a litre of milk or get a haircut. Inflation increases your cost of living and reduces your purchasing power. So as prices rise, so your money buys less – for example what I can buy for R100 today, I will not be able to buy for the same R100 in a few years from now due to inflation. That’s how inflation reduces your standard of living over time.
Ramalho says when one is saving smartly, you would want the interest rate you are earning on your savings to be above the inflation rate so that the value of your money increases over time.
“So, let’s say I am saving with African Bank at the best tax-free rate of 8.67% and inflation is 5.1%. Then the difference between the interest rate I am earning on my savings and the current inflation rate would be the rate at which I am saving above inflation. You take the bank rate of 8.67% minus the inflation rate of 5.1% to get the percentage of 3.57%, which means you will be saving above inflation. This will increase the value of my money over time.”
Ramalho says unfortunately too many people try to save using savings account offering below inflation interest rates, not realising that in the end, inflation is beating them and only diluting the value of their money over time.
“Get smart. Look at other savings options which offer you an above inflation interest rate. Ideally look at cash-based products which offer SA’s best rates and returns and which are guaranteed over a fixed term. Not only will they outperform inflation but also offer lower risk than other investment or savings options,” concludes Ramalho.