Your Savings in the Bank are Losing Money.

Piggy bank

Dec 06, 2018

Your savings in the bank are losing money every day. Keeping your savings in cash is one of the fastest ways to burn a hole in your net worth. This applies to many repos as well. By ignoring the rate of inflation or accepting sub par returns on your investment, you are reducing the future value of your investments. It’s also important to note that interest rates on lower risk USD investments are now higher than interest rates on JMD investments.

To calculate how much your savings are costing you, look at the rate of inflation. If you are saving in USD, your USD savings are losing roughly 2% of their value each year. That means that USD10,000 in 2018 will be worth USD6,730 in 2038. That is a 33% decline over a 20 year period. If your money is on repo earning 2%, it is also just breaking even. On average, over the last 16 years, your JMD savings in the bank lost 9.3% per annum excluding the impact of devaluation. Inflation is a very important metric for quantifying the return on your investments and for valuing any future stream of cash flows.

A small difference in rate, makes a large difference over time. You may think that 3% or 2% does not sound like much. However, these small differences make a big difference over the medium to long term. For example, if my USD repo investment is earning 2% I may be ignoring the fact that I could be earning 6% on a medium term bond issued by an investment grade company. 4% compounded over 10 years increases your principal by 49%. For example, USD10,000 earning 4% each year will become USD32,433 at the end of 30 years. Don’t ignore small differences in the rates of return on your investments. 

Back in January 2009, the 3 month BOJ Treasury Bill yielded around 22.3%. At the most recent BOJ T-Bill auction in June 2018, this yield was recorded at 2.54%. Sovereign yields have also declined quite significantly. Today, 11 year GOJ JMD paper is yielding just over 5%. Interest rates are at historical lows in Jamaica. JMD liquidity levels are also higher thanks to the absence of Sovereign issues in the local market. Indeed, these conditions are prerequisites for economic growth and the Bank of Jamaica has successfully created an environment that no one thought was possible. However, investors are now challenged to find higher yielding investments without a corresponding increase in risk.

Don’t ignore inflation in your return calculation and most of all, don’t accept lower returns on your investments. The good news is that there are instruments available with HIGHER yields and at LOWER risks than those available locally or regionally. 

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