Most people think that banks are where you should keep your money. And where else, other than a savings accounts. But they are wrong! A savings account is like a working desk where papers and files come, get handled and moved out. You do not keep storing files and papers on a working desk!
When it comes to handling your money, make sure that you treat your SB account like a to do list. As soon as the salary credit comes, decide where to invest it. Any other investment product will yield more than an SB account.
1. Savings Bank interest are much lower than Debt Mutual Funds
The interest of most banks is just about 4%. Debt Mutual Funds on other hand give about 8% to 9%. While the yield varies, one can be reasonably sure that it is 2%-3% higher than a Bank SB rate.
2. Savings Bank interest is taxed every year
The interest of most banks is clubbed with your income and taxed every year. While there is an exemption upto Rs 10,000 this aspect will hurt as your interest income begins to grow. With Mutual Funds you the gain is taxed only upon withdrawal. This leaves your money for compounding for a longer time.
3. Savings Bank interest does not enjoy indexation benefit
The interest you earn in a bank does not enjoy indexation benefit; whereas a Mutual Fund does. If you earn 8% on a debt mutual fund and inflation is also 8% then you pay zero capital gains tax. If inflation is 7% the gain is adjusted for the inflation, effectively making it just 1% before calculating tax. Please see illustration below.
Conclusion
We are not asking you to shut down your Savings Bank Account. You of course need it for receiving and paying funds. However, keep your SB balance to the bare minimum, to avoid any fees. Any ‘loose’ or ‘spare’ cash must be moved to debt mutual funds to derive maximum benefit.
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