Mad_About_Money_final Mad About Money_Dec 2016 | Page 24

MadAbout

MadAbout

Money

Money

Banks will never
make you rich

deposit account matures after a specific time
period. So, let us see at
some of the reasons as to
why fixed deposit returns
are not that much high as
you think them to be.

High inflation
rate

irst, let me tell you
what fixed deposits offer you. Fixed
deposit accounts offer
fixed interest rates till the
account matures. Some
banks offer interest rates
of over 9% on one to two
years of fixed deposits.
People put money in
fixed deposits because
they get higher returns,
as these accounts
compound money on a
quarterly basis.

The inflation rate is higher than the interest rates
offered by banks on their
fixed deposit accounts.
This is why you do not
get as much returns on
your fixed deposits as
you think. The consumer
price inflation rate on an
average basis in India is
nearly 9.76%.
This shows that all your
returns are cut by inflation, since fixed deposit interest rates are not equal
to the inflation rates. The
actual amount that you
get after inflation is called
the ‘real rate of return,’ as
the value of money changes after one year. Let me
explain this through an
example.
For instance, Rs. 100 today
will be reduced to Rs. 90
next year with a 10% inflation rate. So, if the inflation
today is at 9.76% and the
bank offers a 9% rate of
interest on fixed deposits,
then the real rate of return
that you get after inflation
is negative with a loss of
0.76%.

However, the yields that
you receive when your
fixed deposit account
matures are not as higher
as you deem they would
be. Factors like tax and
inflation may cut down
the yields as your fixed

And, this is what you get
even without taking tax
liability into consideration. This means that you
have not generated any
money through bank, but
in fact eroded your money by putting it in a fixed

Although banks are seen as a means to
increase your savings and get rich, they can
actually never make you rich. Yes, it is so true!
If you too think that by putting your money
in a fixed deposit at a bank can make you rich
overtime, then you are wrong.

F

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The inflation rate is higher than the
interest rates offered by banks on their
fixed deposit accounts. This is why you
do not get as much returns on your
fixed deposits as you think.

deposit account. Due to
this, a fixed deposit account at the bank cannot
make you wealthy, till you
have inflation less than
2% like in America.
And, even if it gets lower,
then also the RBI will reduce the rate of interest
and put it at 2%, which
means that you can never make money through
banks. This is why people
invest in other financial
assets, such as shares,
gold, and real estate.

Taxes
Other than the high inflation rate, there are taxes on

bank interest rates, which
further reduce your yields
from banks. TDS or Tax
Deducted at Source is a
tax that is applied on interest that you earn from
a fixed deposit account.
Higher your earnings will
be the lower returns you
will receive, since then
you will have to pay higher taxes.
Thus, banks never make
you rich . And although a
fixed deposit account aids
you to build a lump sum
amount of money over
time, it does not make
you rich. The key is to
invest in other assets too
along with a fixed deposit.

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