Saving Money In The Bank Vs A Regular Savings Plan
Section 16 Module 5
So, by now, you have understood, that ‘Starting To Save Early’, is much better than leaving it till late.
But there are two ways to ‘Save Money’:
- Save Money In The Bank
- Save Money In a Regular Savings Plan aka Systematic Investment Plan
1. Save Money in the Bank
But keeping money in the bank is safe!!!, said a client to me.
So what is safety? Ensuring that you don’t lose your capital?
Did you know that if you have AED 100,000 in the bank, earning you 1% per annum, and inflation is 3% per annum, you are losing 2% in buying power every year?
i.e. you are making AED 1,000 every year on your 100K in the bank, but losing AED 2,000 in purchasing power each year.
Its like trying to fill a bucket of water with a hole in it. Is that safety?
So, the alternative to banks, is to invest regularly in a vehicle that gives you returns more than 4-5% per annum, to get your money working for you.
2. Save Money in a Regular Savings Investment Plan
Regular savings plans typically invest your money in a basket of ETFs (Index Funds) or Mutual Funds. (Read more about ETFs & Mutual Funds in the last chapter of this guide).
In principle, your money get’s invested, and will generate some return, hopefully more than inflation.
The amount of return you can get depends on the choice of the investment portfolio, and the charges of the savings plan. (You can read my reviews of the different savings plans in the UAE, here).
A good financial advisor can structure your savings plans correctly and help you investment returns much higher than inflation.
Comparison of Bank Savings Vs A Regular Savings Plan
In summary, here is a very simple reason to start investing. I have tried to explain it in a way you will understand.
Scenario 1 - Saving in the bank for your child’s college fund
Assume, you hate investment risk, and want to keep your money in the bank only, and you need to save USD 120,000 for your child’s college fund in 10 years.
In this case, you would need to save roughly USD 1,000 per month for the next 10 years assuming your bank gives you interest less than 1% per annum.
Scenario 2 - Saving A Regular Savings Plan - for your child’s college fund
In this case, you are willing to take some investment risk, and are ready to invest in a savings plan. Assume that you need to save the same USD 120,000 for your child’s college fund in 10 years.
You would need to save roughly USD 639 per month for the next 10 years assuming your savings plan contributions grow at 8% per annum.
The choice is yours - Pay more to achieve your goals (with less risk), or pay less to achieve your goals, because your money is working for you, not the bank.