Thursday, November 19, 2009

Concept: Why fixed deposits are hell bent on making you lose wealth

I've often heard of people talking about how little their fixed deposits give them which got me thinking. Why, for the love of all that is holy and pure, do they not look for a better alternative? Procrastination? Perhaps - happens to a good percentage of our population. Or is it because of something much darker and sinister in nature? Oh yes you guys got it right - RISK.

Now, lots of people out there do not understand inflation. Upon understanding inflation, one will know that keeping your money in fixed deposits is actually putting your wealth at risk. Allow me to spend some time to explain briefly about what inflation is. The current estimated inflation rate (for 2009) is 5.7%*. That means that every year, the value of our money is depreciating by 5.7%. Assuming you had RM1,000.00 worth of fixed deposits in 2009 giving you a measly 2.1% return. By 2010 your RM1,000.00 will have grown to RM1,021.00. But lo and behold! Because of inflation, your money had dropped in value by RM5.7%! That means, instead of your money growing to RM1,021.00, it actually shrunk to RM964.00 (RM1,000-[1,000.00X(5.7%-2.1%)]) by including the effects of inflation. Of course, you would not see this in your fixed deposit statements. Rather, it will be reflected on the value of your money.

Putting in it laymen terms, lets say your grandma kept 20 cents under her pillow 15 years ago. For some odd reason she kept the money 15 years ago because she knew at that time she wanted to buy a bowl of cendol 15 years later. Imagine her horror when she finds out that 15 years later, 20 cents could only buy her 1/8 of a bowl of cendol!

Having considered that fixed deposits are well...fixed. *rolleyes*. Whereby the returns are fixed in a way (very minimal fluctuations) and in a very ironic sense, fixed deposits are also 'fixed' on making us lose money in a 'fixed' sort of way, why do we not consider other forms of saving? For instance, mutual funds that will give you a chance to leverage against inflation because they are NOT fixed. Why doom yourselves to a fixed rate of wealth declination. Why not choose to invest somewhere else and gain a chance? Repent now!


Shaun Ng, Signing Off. =)

No comments: