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Tuesday, December 18, 2012

The Myth of Saving Accounts

Savings Accounts
This should be an easy one. Which one is better: Rs. 100,000/- invested in a savings account in Pakistan or an equal worth of Pound Sterling lying in your drawer?

Well, the first thought that comes to one's mind is that money put in a savings account is better than the same lying in the drawer. After all, the savings account is supposed to give your some profit/ interest; isn't it?

Let's do some calculations.

Usually, the longer the term of investment, the better is the return given by the bank. Let's take the example of Bank Al Habib's Special Saver Certificate, which as of today is giving 8.75% profit for a 1 year certificate. I believe this is a pretty good rate of return.

With an investment of Rs. 100,000/-, after a year, you will have Rs. 108,750/- in your account. Let's say that you invested this money on 1st Jan 2012 and obtained the profit on 31st Dec 2012. Now, let's compare this with buying and selling British Pounds on the same dates.

On 1st Jan 2012, Rs. 100,000/- would have given you something around £712 (using Oanda.com's historical converter). Selling these 712 pounds now (as on 18-Dec) should get you Rs. 113,568/-!!

Amazing are the ways of inflation!