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Money saved is money earned – but you cannot apply this to funds left idle in the bank. Idle cash that does not generate any return or nominal returns may ultimately lose its value. But what causes money to lose value even when stored securely in your account? The simple answer is the decrease in the value of money over the long term. 

When there is a decline in purchasing power, it leads to an unexpected increase in prices, also known as inflation. Inflation negatively impacts your idle funds, ultimately resulting in a loss. 

To know why inflation happens and how you can avoid that loss, read on.

How does money lose value in a bank?

Earlier, money left in the bank generated returns at a meaningful rate and was also a convenient and safe option. However, the notorious combination of high inflation rates and paltry returns causes the depreciation of money value. 

This is because banks pay interest rates less than the inflation rate. The inflation rate is the rate at which money loses value. Take the average prevailing interest rates banks offer on our savings deposits today – about 4%. In contrast, the inflation rate in India for 2022 was about 6.67%. 

To understand this better, here is an example: Suppose you have ₹1 lakh in your savings account. At an interest rate of 4%, you’d earn ₹4,000 as interest. However, given the inflation rate of 6.67%, your funds ideally should be ₹6,670. When you adjust this against the interest, it shows that you lost ₹2,670. 

The loss may not seem that high, but it adds up over time. Moreover, the loss may be even higher if you have a larger sum in your savings account. Hence, you must know how to protect cash from inflation for better financial planning.

The bigger problem is the dynamic nature of money markets, which increases risk and uncertainty. Markets move up and down in a cycle and you need to choose the right time, a suitable investment product and a good strategy to avoid losing money. 

How to increase the value of your money?

The fuzziness around inflation, volatility, market returns, and risk leaves no sure-fire way to answer the common question of how to multiply money in the short term and long term. However, you can find a solution with due diligence and goal setting. Doing this will allow you to park your hard-earned money in a better way and earn inflation-beating returns than leaving idle cash in the bank. 

There are two other ways of multiplying your money’s value. One is through short-term money instruments like trading derivatives, short-term bonds, etc. Fixed deposits are a safe option, too.

The other option is long-term instruments. You can also buy index-based and mutual funds or invest in ETFs to spread risk and peg your returns to the market. Your money allocations should be across sectors to focus on quality stocks.

You may even pick and choose from a multitude of mutual funds across industries with different maturities and investment types. Some of them also give regular dividends. Liquid funds provide stable returns and you can also convert them to cash quickly. 

What’s even better are the tax benefits and a lower expense ratio that such instruments offer to buyers. You can also beat inflation with debt funds if you have a moderate risk appetite. 

With returns on ELSS and multi-cap funds over a 3- and 5-year period crossing 16%, investing in such funds can be beneficial. Furthermore, equity stocks and bonds come with high liquidity, as you can buy and sell them quickly in the secondary market. This way, a balanced portfolio can help you beat inflation in good or bad times. 

However, these options are riskier than traditional instruments like fixed deposits, PPF, etc. Even then, the opportunity cost of idle money is higher than the risk premium paid in most cases. If you are risk averse, you can invest in FDs, giving up to 9% returns and leverage the magic of compound interest.

Just as little drops of water make the mighty ocean, a small amount of money appreciation can make you significantly wealthier in the long run. Allocate money judiciously in different instruments and make the most out of your earnings. 

If you’re ever short on savings, there’s always Fibe’s Instant Personal Loan to assist you. With Fibe, you can get a loan amount of up to ₹5 lakhs within a few minutes. Download the Fibe Personal Loan App or register on the website to enjoy quick, easy and hassle-free borrowings.

FAQs on Decrease in the Value of the Money

1. What is devaluation and how does it affect my finances?

In simple terms, devaluation is when one country adjusts its monetary policy, wherein the currency value goes down against that of the other. Devaluation ultimately results in a decrease in the value of the money, reducing its purchasing power. 

2. Should you keep money in savings when inflation is surging?

As the adage goes, don’t put all your eggs in one basket. So, you must know how to save money during inflation. You can keep some money in your savings account as an emergency fund. But ensure you invest in low, moderate and high-risk investment avenues. This will ensure you get the best returns. 

3. Why is money losing value in a savings account?

Inflation is one of the answers to the question of what causes money to lose value in a savings account. This is because the interest rate for a savings account is generally lower than the inflation rate, resulting in a loss. 

4. Should you save your money at home or in the bank?

Ideally, you should save money by investing in many options, such as FDs, PPFs, mutual funds, gold and more. This ensures that you don’t face a significant loss when there is a decrease in the value of money due to inflation and other economic causes.

5. Is it bad to have a lot of money in a savings account?

The answer to this depends on the interest you earn. If the interest rate exceeds inflation, you can keep a high amount in a savings account. However, a smarter option to keep the value of your money intact is to invest it in various options such as FDs, mutual funds, or gold. This will allow you to make up for the decrease in the value of money by adjusting it against the high returns from another instrument.

If you are looking at growing your money, the world of investments has no limits. While there are conventional methods of investment like fixed deposits, PFs, bonds and more, there are multiple alternative methods you may want to explore too.

Non-traditional methods can surprise you and provide outsized results. Here are a few different types of non-traditional investment methods that you should know about:

1. Digital Gold Currency

Digital Gold Currencies or DGCs, are a form of virtual or electronic currency based on gold mass units. These are representative currencies that are available for exchange for gold on demand. Linked to grams as their measurable units, DGCs are now issued by various companies.

Backed by gold reserves by private agencies, DGCs are best suited to survive during economic turmoil, considering that they are not tied to any monetary policies or economic systems of a country.

Read more about How to save money

2. Equities

While equities can seem like a popular investment option, the truth is that only 2% of the country invests in the stock market. That’s a staggering amount of people left out of one of the most visible indicators of our economy. This is partly due to a lack of understanding of how this asset class works, and the related apprehensions that brings with itself. But in the process, you’re missing out on opportunities for solid returns on your investments – the Sensex delivered a 17% return in 2017 and 11% in 2018.

You may want to test the waters by beginning with mutual funds – generally a less volatile, and easier to manage investment than stocks and shares directly. Get yourself a demat account to begin.

3. Inflation-indexed bonds

Inflation-indexed bonds are a measure of protection taken by the RBI (Reserve Bank of India) that acts as a hedge against inflation. This investment choice is particularly to safeguard your bond holdings. While a regular security bond of the government is subjected to the risks of inflation, inflation-indexed bonds are free from it. Sold in the secondary markets, there are no set fees for this service and these bonds score higher with respect to capital protection.

4. Collectibles

Collectibles are an interesting investment choices for tangible investments. They tend to usually include vintage antiques, precious metals, numismatic and rare coins, watches or anything whose value is likely to rise in time. The key to investments in collectibles is the question of rarity – the price demanded is higher for anything exceptionally rare. However, it is extremely important to have a thorough investigation before investing. It is also vital to ensure that you are investing money that you can afford to lose, considering the volatility of prices in the market. That said, collectibles are ideal investments for failed conventional investments.

Read more about How to invest epf savings

5. Real Estate

Real estate is one of the best tangible assets for money investment and growth. This is because unlike others, its price has historically consistently performed well over the long term. The three basic ways of investing in real estate are:

1. Buying your own house – This is the simplest investment in real estate considering the fact that you would have to live there too. This is beneficial in increasing your ownership equity through mortgages and appreciation of the property.
2. Investment in rental properties – Investments in rental properties add an extra flow to your already existing income. However, it is important to understand that rental real estate is a hand on activity, meaning this requires a larger investment in terms of down payments and market prices. Nevertheless, it is the perfect way to grow your money on a long term basis.  
3. Real Estate Investment Trusts or REITs – REITs are like mutual funds in the real estate market. These are trusts that are sold on known exchanges, from which you can either invest in the property or its mortgages. A new asset class that’s only just launching in India, an REIT is generally categorized into multi-unit apartments, commercial flats and retail buildings. An advantage of REITs is that they have huge tax benefits and provide higher yields too.

Investment is a slow and steady process; it is important to remember not to dip your feet into every pond. And while you’re at it – remember that it’s only prudent financial management that will enable you to invest well in the first place. If you’re short on funds, you may want to look at instant loan from Fibe to meet your urgent needs and maintain financial wellness.

If you’re beginning to enter the world of investment, starting with one or two traditional investments and then working your way up to the non-traditional ones is an ideal way to play this field.  

It is believed that living well and achieving dreams like buying a car, travelling or buying a home require quite a bit of financing as well as financial planning. Saving a bit of your income each month goes a long way if you wish to lead a comfortable life and be prepared for emergencies like losing or quitting your job, or a sudden medical problem. This brings us to the question on everyone’s mind these days – how much of our salary should we save per month? There are several ideas regarding this, but a lot of them stem from the one popularized by American Senator Elizabeth Warren, called the 50/30/20 rule. However, it’s not the only one. Here are some ideas on how to go about keeping aside some of your income as savings.

The 50/30/20 rule

Simply put, the rule suggests that:

• 50% of your income must be channelled towards your “needs” – essential items that we can’t do without – like food, rent, electricity, etc.
• 30% should be spent on your “wants” – non essential items but desires you’d be happy to fulfil.
• And 20% should be put into your savings.

This 20% can be split between retirement savings, an emergency fund and investments, including mutual funds, SIPs, stock market investment, etc. Savings could also indicate debt repayment, as any interest payment would reduce future debt. This rule can’t really be applied everywhere, especially if your salary is too low, or if your financial goals require you to save more. However, it is an excellent guide for someone who doesn’t know how to start saving.

Rules for retirement savings

One of the most popular rules of thumb when it comes to retirement savings is to put away 10% of your income every month. Most careers have a retirement age, that is, when you turn approximately 60, you’d probably want to (or have to) stop working. However, your basic needs and wants are unlikely to reduce after you stop working. In fact, your standard of living would’ve risen signifiacntly over the years, making it more expensive than ever before. Plus old age can bring with itself health problems, which invariably leads to more expenses. Saving a certain amount, specifically for when you retire, is a good idea.

10% of your monthly salary is a good start, especially for youngsters who have just started out. However, if you start late, you’ll probably have to put more of your income towards your retirement. You could put the money in a retirement fund, or according to the returns, invest in some long term mutual funds. Another approach is to save money considering that by the time you retire, you should have 20 times your annual salary saved up. This is a more comprehensive approach than that 10% rule, as you can save a particular amount depending on when you start saving.

Emergency fund rule

A popular belief is that you should have enough money stored up in an emergency fund to last you between three to nine months. The fund should cover your living expenses for this time period, including food, rent, any debt repayments, health requirements, etc. This is usually in case you suddenly find yourself without a job, so there is no need to include costs for entertainment, dining out and other things you would indulge in otherwise.

Although three to nine months’ worth of money is often not enough, as you may be out of a job for longer, it helps to know you can at lease survive for so long without a steady salary. It is, however, believed by some that it’s unwise to keep so much money in a savings account when it can be invested for higher returns. Others argue that this fund is not necessary at all. Of course, if you don’t have this money stocked up and need money urgently, you can also apply for instant loans or a salary advance through apps like Fibe to get you through for the time being.

The money ratios approach

Charles Farrell, in his book “Your Money Ratios”, suggested an approach to calculate savings rate considering age, current income and current savings:

• According to him, you need to accumulate 12 times your annual salary by the time you retire.
• Assuming that your invested money will give a return of about 8% annually, you can live on about 80% of your annual income even after you retire.
• He also suggests that you put the money you’re keeping aside in a retirement account, or invest it somewhere which will give you good returns at low risk.

Of course, all these rules are subjective and only serve to provide a set of guidelines to work with, when you don’t know how to start saving. Before following any of these rules, it is recommended you first look at your financial goals. If, for example, you wish to buy your first car in ten years without a loan, you need to start saving up for it accordingly. Calculate how much you need to invest per month, and estimate the returns you must get through your investment over ten years in order to buy the car. The approach is similar for any financial goals you may have. But putting away a small amount towards your retirement and keeping some money aside for emergencies are two things that must not be ignored.

Just landed a new job and struggling to meet ends? Don’t know who to turn to for your temporary cash-crunch? A salary advance can be a panacea for all your liquidity problems. The concept technically refers to an early payment of a portion of an employee’s salary – but is often used to refer to instant loans and cash advances before paydays. These advances are usually recovered in installments.

The Why

As banks lure the salaried class for home and car loans, those who miss out are the ones who are hard-pressed for money to meet immediate expenses. Many today are unable to navigate into the corporate world as their expenses mount. After all, establishing yourself in a brand new place requires capital. Right from arranging accommodation in metro cities to meeting short-term travel expenditures, keeping up with all the added expenses is a daunting task. This is where monetary help such as salary advances can help.

Most of us attempt to save for a rainy day fund. But with costs of living on an upward trajectory, coupled with those few times when we give in to our urges, it’s a difficult endeavor. Moreover, in a country like India where festivities are welcomed with much gaiety and expenditure, money crunch is a common problem. It is almost like a faucet that won’t turn off.

The What

To navigate rough waters, you may avail of salary advances.  A salary advance has the following advantages:

1. Fast Processing and Disbursal: Taking a loan from a traditional bank is tedious and time-consuming. It takes weeks to process the loan and a lot of paperwork. However, waiting is not an option when you have an urgent personal need for cash. That is why salary advance which generally takes only a day or two to be processed and disbursed are preferred over loans.
2. Interest Rates: Usually, when you take a personal loan, the interest rate on it starts accumulating soon after its disbursal. However, in case of salary advance like the one offered by Fibe, you’ll only be charged for the number of days you use the money.
3. Comfort with Flexibility: Salary advance loans come with several repayment options. The flexibility ensures that there are much lower chances of you being out of money when the repayment is due. Moreover, you may use your salary advance anywhere and everywhere, with restrictions.
4. Borrow small amounts: Need some cash for that much awaited Goa trip or that feature-packed smartphone? Guess what, you can take even small advance salary loans.

Nobody likes walking on a tightrope. So, why should you when you are financially constrained? A salary advance is extremely beneficial in grabbing opportune investments. It also helps during unplanned hospitalization or other unfortunate events, where immediate money is needed. A salary advance can help you with everything from the purchase of a house or a car, timely payment of deposits, etc. However, with less than two per cent companies in India giving advance salary support to their employees, an individual should be ready with Plan B. The need for the sector is fairly apparent – over 200 salary loan apps are said to be competing in India to meet these customer needs – a fairly large pool, but one in which EarlySalary, the best advance salary app, stands out (more on that, below).

The How

As Shakespeare wrote in Hamlet. “Neither a borrower nor a lender be. For a loan oft loses both itself and friend”, asking friends or family for money can potentially strain relationships. If you need extra money for an unexpected emergency, there’s one source: Fibe’s Salary Advance. A unique salary advance app that can assist you meet short-term pecuniary needs with quick turnaround time and zero paperwork, Fibe allows you to borrow up to Rs  2,00,000 with interest rates as low as Rs 9/day. The platform has also partnered with major ecommerce portals to allow you to make purchases directly from their custom wallets, making it easier than ever to make those urgent (or even impulsive) buys.
Tide over your month-end and mid-season blues, with EarlySalary’s direct cash transfers or shop with partner websites today and pay later in EMIs at no extra cost. Sign up here!