Although banks are seen as a means to increase your savings and get rich, they can actually never make you rich. Yes, it is so true! If you too think that by putting your money in a fixed deposit at a bank can make you rich overtime, then you are wrong.
First, let me tell you what fixed deposits offer you. Fixed deposit accounts offer fixed interest rates till the account matures. Some banks offer interest rates of over 9% on one to two years of fixed deposits. People put money in fixed deposits because they get higher returns, as these accounts compound money on a quarterly basis.
However, the yields that you receive when your fixed deposit account matures are not as higher as you deem they would be. Factors like tax and inflation may cut down the yields as your fixed deposit account matures after a specific time period. So, let us see at some of the reasons as to why fixed deposit returns are not that much high as you think them to be.
High inflation rate
The inflation rate is higher than the interest rates offered by banks on their fixed deposit accounts. This is why you do not get as much returns on your fixed deposits as you think. The consumer price inflation rate on an average basis in India is nearly 9.76%.
This shows that all your returns are cut by inflation, since fixed deposit interest rates are not equal to the inflation rates. The actual amount that you get after inflation is called the ‘real rate of return,’ as the value of money changes after one year. Let me explain this through an example.
For instance, Rs. 100 today will be reduced to Rs. 90 next year with a 10% inflation rate. So, if the inflation today is at 9.76% and the bank offers a 9% rate of interest on fixed deposits, then the real rate of return that you get after inflation is negative with a loss of 0.76%.
And, this is what you get even without taking tax liability into consideration. This means that you have not generated any money through bank, but in fact eroded your money by putting it in a fixed deposit account. Due to this, a fixed deposit account at the bank cannot make you wealthy, till you have inflation less than 2% like in America.
And, even if it gets lower, then also the RBI will reduce the rate of interest and put it at 2%, which means that you can never make money through banks. This is why people invest in other financial assets, such as shares, gold, and real estate.
Other than the high inflation rate, there are taxes on bank interest rates, which further reduce your yields from banks. TDS or Tax Deducted at Source is a tax that is applied on interest that you earn from a fixed deposit account. Higher your earnings will be the lower returns you will receive, since then you will have to pay higher taxes.
Thus, banks never make you rich. And although a fixed deposit account aids you to build a lump sum amount of money over time, it does not make you rich. The key is to invest in other assets too along with a fixed deposit.