You often hear banks talking about special rates and products that give exciting returns, like a Term Deposit with a high 5% rate that’s guaranteed to be the best interest rate around.
Unfortunately that high rate of 5% is only guaranteed to lose you money. Here’s why:
After Resident Withholding Tax (RWT), which is automatically taken by the IRD via the bank before you get your hands on your interest, that juicy 5% is only worth 3%.
The problem is that 3% is about in line with inflation. So even though you may see the numbers going up in your bank account, in real terms your bank balance isn’t changing at all. In other words, your savings which could have bought you a new car 10 years ago, are still worth about the same as a new car now.
But wait, it gets worse. Banks often have fees, odd ways of ensuring that you don’t qualify for the full 5% each month, and other such problems that mean you don’t quite get the return you were expecting.
And the worst of it all is the opportunity cost of putting your money in the bank. Your money could be earning so much more elsewhere.
Now I’m not saying that putting your money in the bank is the worst thing to do. It’s a perfectly suitable way to store money if for example you’re saving for something over a short period of time, can’t afford to risk money, are financially incompetent, or have so much money that you need to spread it over a number of places to reduce risk.
My goal in this article is to highlight the fact that (with the exception of periods of unusually high interest rates or zero to negative inflation), banks are not an investment that will grow your money.