Is saving money in bank, do us any profit?

photo by Alan Cleaver

Our parents once taught us to save our money aside. Be it in a piggy bank or bank. When we grow up a little bit we were opened an account in bank. Then we gotta work. For most of us, our salary is transfered into our bank account. They said that when we put our money in bank, we get paid an interest. Now in Indonesia, the yearly interest rate is about 2.25% (BCA - Bank Central Asia). So if we put Rp. 10,000,000.- in BCA on 2009, then in the end of the year, the money in our account would become Rp. 10,225,000.-. It is still not be accounted for tax, administration fees, etc (check it here). It seems that we make a profit from it, but actually we don't. Why?

Meet Mr. Inflation! Inflation is simply described as a decrease in money value. It means things you buy in stores or supermarket has its prices increases over time. Remember that when you were 10-15 years old, you bought a bowl of meatballs, it only cost you about Rp. 1,500.- (more or less). Now when you buy a bowl of meatballs, the same bowl size and the same portion too (but maybe with an entirely different appetite :p), it will cost you about Rp. 5,000.-. So prices have gone up more than 200% these past 10 years. It also means that the money value has been weakened by more than 200% in the past 10 years.

So, if yearly interest rate in BCA is 2.25%, Mr. Inflation too has a rate. In 2009 in Indonesia, the Inflation rate is about a little bit more than 4%, let's just say 4% to ease our calculation. Already get the math here? While we put our money in bank we get 2.25%, the money value itself has been decreased by 4% in year 2009. So [+2.25%] + [-4%] equals [-1.75%]. So that means while we put our money in bank, we clearly didn't make any profit from it. Thanks to Mr. Inflation! For your information, in 2008 the inflation rate was much worse than in 2009.

Can we take advantage of this situation? Yes, of course we can! To put it further into use, let me paint you a picture. If you own a business, you can increase or decrease your products/services prices or profit margin by adjusting it properly with the year's inflation rate. If you work as an employee then your salary should be raised by your employer, for each year you spend working, at least by a same level of each year's inflation rate :p.

Ok, so now we already know Mr. Inflation a little bit. It seems at first that he is not quite a good person. But don't judge the book by its cover. In my next post, I will explain the bright side of Mr. Inflation. If you like this post, share with your friends by dragging the blog title or drag this link instead. This is Aristian speaking, over and out!