Consider Inflation Rate When Doing Bank Deposits

Many people believed that doing deposit in the bank will earn them extra money from interest from their deposit, thus gaining them more wealth.

Earned money from deposits will increase your accumulated money through time but it does not ensure that your capability to buy more will also increase. This is because of the inflation rate. Inflation rate is the rate of decrease in the purchasing power of money.

Inflation rate must be considered when doing deposit, especially if the type of deposit has a low interest rate like savings deposit. If the inflation rate is higher than the interest rate of your bank deposit, in essence, your money is actually losing.

For example, you time deposited $100 at 3% annual interest rate. At the date of maturity and assuming zero withholding tax, your banked money will be $103.

On the date when you open an account, $100 can buy 100 pieces of candy. However, if the inflation rate is 5% annually, your money actually losses 2% of its purchasing power after one year in the bank. Though you earned $3, you still need $2 more to buy 100 candies. In short, the purchasing power of your money at maturity period will only be 98% of the purchasing power of your money a year ago.