POSTED BY February 21, 2019 COMMENTS (27)ON
Today I want to talk about a mistake which we are all guilty of at some point of our life – “Keeping too much money in saving bank account”
I can understand how confident and great we feel, when we know that we have a big amount in our saving bank account and if required we can just walk to the ATM and get the money within minutes. Nothing can beat that feeling !, however there are some downsides to it too.
I want to talk about 2 problems (one small and one big) associated with keeping too much money in your bank account today.
You must be thinking, how can keeping money in my account be a problem? After all, more money in account is a good thing – RIGHT ?
Lets talk about the small issue first.
The money in your saving bank account earns a small interest of just 3.5% per year (in most of the cases). Inflation is around 7-8% on average and if you consider that, you are actually earning a negative real return (real return = return – taxes – inflation).
So your purchasing power is only diminishing over time. What you can buy in future is less than what you can buy today!. If the excess amount you keep in your saving account is very small, then you can dismiss what I said, because the excess money in a way serves as your emergency fund, but when you keep big amounts, its an issue.
Don’t keep too much money in saving accounts
I have seen investors keeping a very large amount in saving account for a very long period of time.
We recently saw the data of one of our client, and he was having 90 Lacs in his saving bank account from last 4 yrs. He had sold his house because he wanted to purchase a new house, but then he did not finalise the new house for a long time and never invested that money for better returns. It just did not hit his mind! (not taking any action is so EASY)
So he earned just 3.5% on that 90 lacs for 4 yrs, which is around 13.2 lacs of interest (without considering taxes). If only he had put that in a liquid mutual fund or a fixed deposit, he would have earned 26.2 lacs as interest (without considering taxes again).
Which means that he said NO, to that potential extra 13 lacs by just leaving that big amount in his saving bank account.
Now in your case, the quantum of potential loss will be only to the extent of the money you have in your account.
A lot of us, don’t keep 90 lacs in saving bank account (do we even have that much networth?), but its not very uncommon, to see large amount like 3 lacs, or 8 lacs lying in saving bank for many months just because the investors does not calculate the potential loss, or is just lethartic of breaking the status quo (I think, this is the real issue)
What you can do to solve this issue?
The simple approach you can take is, that apart from 4-6 months of your monthly expenses, you can park rest of the money atleast in short term debt mutual funds (earns around 8% per annum, with better taxation than a FD) and deploy the rest amount as per your financial goals in other avenues and let it go out of your bank account and your sight.
The 6 months worth of Emergency fund can be broken into 2 parts, where you can keep one part in saving account and other part into a liquid fund (earns 6.5-7% and available in 24 hours notice). This is a far better arrangement compared to just leaving all the money in saving bank account.
I don’t see many people talking about this 2nd point often and its related to behavioural finance. This is very big topic, which deserves a whole book, but I will try to cover it quickly here.
Money is like Water, it finds its own direction, if you don’t give it one!
Our mind works in a very different manner when we have money lying in front of us. Supply creates its own demand is one the principles of economics and very much applicable to money. If you have money in saving account, you can be sure that your mind will come up every possible reason to spend it.
So if money is lying around in your saving bank account, which can be easily accessed then,
In short, your spendings will increase sub-consciously
Human mind is very interesting. You always feel that you are in control of your spendings, but research on this topic has shown that we humans are our own enemy. Its extremely tough to be in control and think rationally about spending’s specially when you have the excess supply of money.
Your environment and which kind of situation you are in, mostly decides how you will behave and think, not rationally! (you need to exercise right? Did you wake up in the morning and go for the jog if that’s the rational thing to do?)
Let money go out of your bank account automatically each month
The beautiful thing about a recurring deposit or SIP, is that it takes away a part of your money out of your sight and makes it tough for you to access it. It creates wealth for you, because your manual intervention is not involved in it. You are not taking manual decision each month if you want to save it or not. I don’t claim that manual investing is superior or not, but it looks great on paper, but not in reality.
If you are struggling to save each month, I think 90% of the reason is that you might be trying to do it manually, thinking – “I will save something for sure if I am left with it at the end of the month” . Trust me it will not happen.
We have had clients, who tell us that they are surprised after 2-3 yrs when they accumulate so much wealth, which happened only because they started an SIP and nothing else changed in their life. Its a structure which automatically helped them in their wealth creation. Its the battle half won, when you want to create long term wealth for meeting your financial goals.
Paytm, Amazon Pay and Cashbacks!
Have you observed that the money you add in your paytm wallet, Amazon Pay or similar wallets gets spent without guilt and so fast! . The moment you add it in Paytm or other wallets, you look at that money in a very different way. Its now “available” for spending (that’s called mental accounting). Well this is a topic in itself, but I wanted to just make a point that when money is not visible, you think about it totally differently.
Listen to the below podcast to learn more about behavioural finance (its an audio uploaded on youtube) which I did along with Siddhartha K Garg.
You become a bit careless with money and don’t think too much when you have Rs 2,34,965 in your bank account compared to say when you have Rs 12,500.
What you can do to solve this issue?
Here are few things you can do.
These were two common problem with having too much money in saving bank account or by any other means. Its always a great thing to let money get locked somewhere (only that part which is not needed for long term).
What are your views about his topic? Do you agree with what I said ?