Earning Real Returns...it's not enough just to be earning interest

by Andrew Mobbs

There was a time when putting money into a bank savings account was considered a worthy investment - "Better than putting it under one's mattress!" they would say.

That time has passed and should be a distant memory. Why then do most of us still do it?

We all probably have different reasons, but for the most part, we think it is because it is a service many of us are familiar with. Not even the banking crisis of 2008 encouraged many people to withdraw their hard earned cash and seek a more secure investment service.

Without realising it, a person putting their cash into a bank savings account isn't doing much better than putting it under their mattress - especially in South Africa where the reported price inflation rate is 5.8% per annum (and probably significantly higher in our estimation).

What does that mean?

Price inflation is a measure of how much prices (and therefore living costs) have increased over a period of time - typically represented annually. If your money isn't keeping abreast of inflation then it is what we call an "underwater asset" - you are effectively losing money even if the Rand notes themselves aren't disappearing.

The table below shows one how to calculate the real return on an investment.

Calculating your Real Return
Price Inflation 5.8%
Bank Savings Interest Rate 3.5%
Real Return -2.3%

Did you know that if your real return remains at that level for 25 years, your money will be worth almost half of what it is worth today?

It is therefore imperative that you consider real returns when planning for retirement. So if you want to stop losing money in a bank savings account (or know someone who should), give us a call on 021 828 2890.

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Welcome to our news section where we will do our very best to keep you up to date with relevant and interesting information about savings and investments. In particular, we will be covering unit trusts and retirement annuities as well as the financial services industry in general.

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