Blog: Why I still believe in saving in a bank

Thirty years ago, I heard that interest rates from the banking system were about 20% per year. Back then, it seemed to make perfect sense to deposit money in the bank. As discussed before, interest is the price of money, and interest revenue represents the price that a bank pays for the use of your money when you deposit. In simplified terms, banks channel money by accepting deposits from clients and lending to businesses and consumers. Banks charge a higher interest to those who borrow, and pay part of this interest to clients.

Sadly, interest rates now are nothing compared to interest rates in the past. Currently, many passbook accounts from Universal Banks only offer interest rates from 0.5% per year to around 2% per year, depending on the amount of the deposit and the type of passbook account. For instance, some passbook accounts offer additional 0.25% or 0.5% interest if no withdrawal is made for the month. These rates are subject to withholding tax of 20% for peso deposits, and 7.5% for deposits in US Dollars and third currencies such as Euro. Rural banks sometimes offer higher rates, but I advise people to be careful. If you wish to invest in a rural bank but you are unsure of its stability, it would be prudent to check if PDIC covers the deposits of the bank, and to only deposit a maximum of Php500,000, which is the maximum amount that PDIC covers.

However, these rates cannot compare against current inflation rates. Inflation is the loss of value of money due to increases in overall price levels. This means that Php100 a few years ago can buy more goods than what Php100 can buy now. This loss of value of money is often used as an argument against saving in a bank.

Personally, I still believe in the value of saving in a bank. First of all, saving money in a bank, particularly a passbook account, builds the habit or the ritual of setting aside money for yourself. As I mentioned in my previous article, savings should be viewed as a payment to the self. Savings should be viewed as a habit, and the act of saving allows you to add a little money to the pile every payday.

Moreover, saving money in a bank allows a person to have a ready pool for emergency purposes. This is what I meant on one of my other articles: “Illiquidity Trap.” Having money in the bank allows one to have cash readily available to meet emergencies.

Third, putting money in a bank also opens the opportunity for you to build a relationship with the bank, which would be important when you apply for loans for your other needs (such as expanding your business or buying a new house).

Fourth, withdrawing money can also be a hassle for many people, especially for passbook accounts, but this is very helpful. Since the money is not as readily accessible, the passbook account also protects you from impulse buying. You would really think about purchasing the new bag or the new shoe, since you have to withdraw the money from the bank before you can use it.

Fifth, saving money in the bank allows a person access to other services such as credit cards and checks. Personal checks are useful since one can pay using checks, without having to bring cash. Some banks such as BPI also provide free credit cards to its preferred banking clients, which is an added service a client can avail of.

Lastly, even if I believe in depositing money in the bank, I also believe in the reality of inflation. Saving money in a bank builds the habit of saving, opens you up to other bank products and services, including potential investments, and provides a pool of funds for emergency purposes. Saving in a bank is only one of the steps towards financial freedom.

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The author teaches subjects under Interdisciplinary Studies, and Finance and Accounting Department at the Ateneo de Manila University. He can be reached via email at [email protected] for queries.