The ‘default’ investment strategy for many Sri Lankans is saving money in the bank. Collect “sathen sathe and deposit in the bank” has been our investment strategy for generations. Parents and adults always encourage youngsters to save money in the banks and they follow the same advice. My objective is to unravel some of these myths about saving money in Sri Lanka. This post contains some economic theories so get ready and put on your thinking hats!
Unlike other countries, awareness about the financial markets and investment opportunities among Sri Lankans are very poor. Out of the lot, 90% believe that saving money in a bank is the best and the only option they have.
There are several reasons for this lack of awareness.
- Lack of proper education in schools about financial markets and investment. Our primary education (from grade 1-13) does not identify the value of financial education among students who are about to enter the real world. Knowing about finance is maybe the best skill a person should have in their life.
- Sri Lankans consider talking about ‘Money’ as taboo. I wonder why Sri Lankans hate talking about money, salary or anything to do with personal finance. We tend to hide these factors even from our closest friends. Try asking the salary from few of you know and you will get my point!
- Most consider it as a burden to learn about finance and some believe only an elite few (like Dhammika Perera) in the society can master the subject of finance and investment.
- Most believe that you have to have paper qualifications to understand how investment and financial markets operate.
- Some just don’t care about their personal finance no matter how educated they are about the financial system.
Why do we save money?
First things, first. We need to identify the motives behind saving money. Majority save money because they receive an ‘interest’ from the bank after a period of time. That is what we all want to believe but my guess is, most save money because they don’t have a clue on what to do with their money; they just deposit money in the bank because there is nowhere else to keep it safe. Some maybe scared to try other investment opportunities and so they use the ‘default’ investment strategy.
Why saving is so bad?
By saving money in the bank, we receive an ‘interest’ after a period of time. For me that is a good deal rather than keeping it in a safe at home. But over a period of time, apart from the interest rate, there is another player that affects our savings. That is the inflation rate. This is a term known by most but understood by very few.
Inflation rate – Increment of price levels over a certain period of time. That is, if the prices of goods increase over a time period; the number of goods that could be purchased from a certain amount of money will be reduced at the end of that period.
So when you hold a certain amount of money over a period of time, at the end you can only purchase a lesser amount of goods using the same amount of money. (Due to the increment of price levels)
If you save money in a bank over a period of time; the interest rate would increase the initial amount and the inflation rate would decrease the initial amount. Don’t bang your head on the computer if you don’t understand. Check out the example below.
You save Rs.1000 in a bank.
Annual interest rate – 4% (fictitious value)
Annual inflation rate – 6% (fictitious value)
Results after a year
Interest from the bank – Rs.1000 x 4% = Rs.40
Deduction due to inflation – Rs.1000 x 6% = Rs.60
What happened to your savings?
Rs.1000 + Rs.40 – Rs.60 = Rs.980
After saving money in a bank over a year, you have actually lost Rs.20 from the initial amount you saved. Of course your bank account will show a balance of Rs.1040 but the power of purchasing has been reduced by Rs.60 over the year due to inflation. Check out a comparison of interest rates and inflation rates over the past years in Sri Lanka.
Over the past years, most have lost money by saving in the bank because inflation rate has been higher than the interest rate. Recently the inflation rate has been reduced and almost equal to the interest rate. Being equal is still not good because we are neither gaining nor loosing and after a period of time we will end up with the same amount we saved.
What can you do?
Enough with the theories and concepts. Now to the fun part. What can you do about this?
First thing you should do is pay attention to your finance! Whether you like it or not, your life revolves around money. So you have to ‘balance’ your pocket to put your life at ease. Try to learn about personal finance. You don’t have to read lengthy books with lots of numbers to know your finance. Just a simple Google search for “personal finance” or “how to manage your money” would give you plenty of simple and realistic guidelines which you can follow daily.
The important point is, get interested in your money. That will lead you to the rest. Also, if you are like me and really interested; I mean REALLY interested in achieving financial freedom, I suggest reading “Money. Master the Game by Tony Robbins”. It’s a gem of a book with a ton of actionable plans to escape from this mediocre life towards financial freedom. Also don’t forget to follow Jump Invest to catch the latest happenings in the Sri Lankan investment scenario!
Image credit : OTA Photos
Disclaimer : Author does not intend to jeopardize the banking industry in Sri Lanka. The intention is merely to educate the reader on the difference between interest rate and inflation rate.
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