Saving in fixed deposits is so safe that it’s risky!

“IT’S best to keep all my money in fixed deposits. It’s the safest!

”That’s the mantra of my young cousin who is just 25 years old. If that’s her only mantra, it may not take her very farin her financial life.

Sure, fixed deposits are popular because their values do not fluctuate. With its fixed rate, it grows consistently, surely and slowly.

If you saved RM100,000 in a fixed deposit account in January 2003 at 3.1% per annum, it would have grown to RM135,700 by January 2013.

But is saving in fixed deposit really safe?

Of course, it is. It’s even guaranteed by Malaysia Deposit Insurance Corp (PIDM) up to RM250,000 per depositor per member institution.

In fact, it’s so safe that it’s risky. Sounds counter intuitive, right?

That is because most people focus on increasing their savings and have overlooked their “real returns”. The real return is derived by adjusting gross return with inflation rate, i.e. how fast prices of goods and services rise.

Hence, real returns determine if you rpurchasing power is increasing or decreasing. For example, if your favourite soup noodle used to cost you RM2.80 perbowl 10 years ago and now costs you RM5.00per bowl (with maybe lesser condiments!), the inflation rate for a bowl of noodle is 6%p.a.

With your fixed deposits growing at a 3.1% p.a. and your bowl of noodle rising at 6% p.a., your FD’s purchasing power essentially “shrinks” 2.9% annually.

Put differently, although your RM100,000 has grown to RM135,700 in monetary value, your purchasing power is only RM74,500 in 2013, less than your original amount of RM100,000 10 years ago!

The above example is a simple one based on a bowl of noodle. If you live a flamboyant lifestyle, your lifestyle inflation rate is surely higher. Hence the buying power of your money reduces at much faster rate.

Fixed deposit is a good instrument to save your well-earned money. However, we should capitalise on them only for emergency funds that we may need in the short-term. The balance of your money must be placed in growth instruments that generate a positive real return and puts real money into our pockets overtime.

Speak to your financial planner to help you identify the suitable amount for your safety net and the instrument that suits your risk appetite. Don’t be too safe until it turns risky!


by lim lee chin AND success concepts life planners vice-president

The writer can be contacted at info@successconcepts.biz