Keeping some money aside is a good habit, but by keeping a substantially large sum in a saving account, you may be acctually loosing the value of your money (as illustrated in the picture). Why? Because it is getting eroded by inflation.....
Increase in prices i.e. inflation is responsible for reducing the value of the Rupee. For instance Rs.100 could have brought you movie tickets and popcorn for an entire family of four in the 1990's today for the same outing you may have to spend more then Rs.1000.
Plus depending on your income level, you have to pay tax on the intrest that you earn on your savings bank account which can further reduce your returns.
Therefore you need to look for investment avenues that help you fight inflation
Illustration
Your Savings + Intrest earned = Total
- Tax on Intrest - Impact of Inflation
= Value at End of 1 year
Int the above Illustration assuming Rs. 1 lakh in your saving account earned Rs. 3500 intrest(@3.5% p.a.) in 1 year. Total became RS. 103500
Tax on intrest is Rs. 1081.50 (@30.9%)
Impact of inflation is Rs.5000 (assumed at 5% p.a.)
net value at end of year =
savings + intrest - tax - inflation impact
= 100000 + 3500 - 1081.50 - 5000
= 97418
the above working are for illustration purpose only and are based on taxation laws as on FY 2010-11. Tax liability of 30.9% is callculated assuming individual investor falls in the top income tax slab of 30% & includes applicable cess. In case of individual nature of tax implications, investors are further advised to consult their tax advisor before making investments. Source for saving a/c intrest of 3.5% p.a. is www.rbi.org.in
Please not:Inflation rate of 5% p.a. is an internal assumption the acctual annual inflation rate and inflation index values are mentiond in "Inflation Index"
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