A close friend once asked me why I don’t keep a single cent in the bank. I replied, “It’s simple. If the inflation rate is 1.7% and my bank pays me 0.01% interest, I’m losing 1.69% in purchasing power every year.”
He gave me a puzzled look. Unfortunately, my friend was unaware of the negative real inflation rate, interest minus inflation, that’s causing the value of his savings to decay over time. Though he wasn’t alone: surprisingly, I asked around and the majority of people had no idea.
So to expose how damaging a negative real rate is on your savings, let’s start with a $10,000 deposit that earns 0.01% interest. The balance increases over time, but your purchasing power — the ability to buy real, tangible assets — decreases by 1.69% each year. It’s unpleasant to know every dollar you save now will depreciate by more than half over your lifetime. During retirement, you’ll want to spend the money you’ve saved but whether it’s a new car, house, or jacuzzi, the price will have increased dramatically.
Savings accounts offered by retail banks are a great illustrator of how our purchasing power is under threat. They wouldn’t dare mention the negative real rate because you wouldn’t think of opening an account. On top of the fees and inflation, you have to increase your balance by around 2% a year just to break even.
It comes as no surprise, then, that most of us acknowledge we’re in a financially repressive era. But it isn’t just a western world phenomenon: it’s global.
For savers worldwide, this is the reality.
- U.S Chase Bank Deposits
0.01% Interest Rate — 1.70% Inflation Rate =
-1.69% loss of purchasing power per year
$50,000 becomes $21,323.32 in Year 50
- U.K Natwest Bank Deposits
0.25% Interest Rate — 1.70% Inflation Rate =
-1.45% loss of purchasing power per year
£50,000 becomes £23,604.02 in Year 50
- Bank of Japan Deposits
-0.1% Interest Rate — Inflation Rate 0.5% =
-0.6% loss of purchasing power per year
¥100,000 becomes ¥37,007 in Year 50
- Westpac Australia Bank Deposits
0.15% Interest Rate — 1.90% Inflation Rate =
-1.75% loss of purchasing power per year
AUD$50,000 becomes AUD$20,682.26 in Year 50
With interest rates artificially low and inflation rampant, relying on banks is no longer a viable retirement strategy. Everyone’s on a timer, and it’s a race to zero. So in this kind of environment, what should you be doing?
Know your options and make a choice:
- Beat inflation by making 2% or more than last year.
- Spend your savings before they depreciate.
- Do nothing and let your savings depreciate.
Although I’ve ranked those in preferred order, the choice you make is indicative of your attitude to life. You’ll break free in one way or another, having made the remarkable decision to invest in yourself.
It’s down to you.
Everyone has various circumstances, outlooks, and views, while the world of money management is an unpredictable journey of danger and discovery but by understanding the environment you’re operating in, you’ll have a great headstart.
Central banks and governments are telling you loud and clear, “spend your money, or we’ll take it away slowly but surely.” The negative rate regime is financial repression in a nutshell and will cease to change as a monetary revolution is nowhere in sight.
Yet there are a million ways to grow your net worth by 2% or more a year; building a business, generating other streams of income, and investing are just a few great examples.
Depositing your savings in a bank, however, isn’t one.