That bank account bleeds your savings

Scrooge McDuck dives into his Money Bin. A timeless picture anchored in our memory since childhood.

Also, a possible origin why so many of us store their hard-earned cash in the bank. Has Disney imprinted us with the belief “That’s what successful people do”?

Nothing’s further from the truth. Right after puberty we should amend that visual memory with a cracked Money Bin leaking cash.

Executive summary

Here’s your key take-aways from this post:

• Your savings lose value over time when they sit in the bank, due to inflation. Central banks make sure of that.
• Interest rates don’t compensate for inflation: not in the past decades, nor likely in the near future.
• Your savings would double every 9 years on average through a typical stock-market investment; not earning that money is an opportunity cost.

Reach to each section for more background, and refer to the Glossary to explain any unfamiliar term and for a summary of key concepts.

And finally, here’s a visual summary of the consequence of holding your savings in the bank (blue line) vs investing them (green line). The dynamics bending each curve are explained in the remainder of the post.

Behind this article

The Swiss rejected a 2021 referendum which aimed at further raising tax for the rich.¹ Proponents noted that the wealth gap increased in the last 20 years.²

“What could be done to uplift the 99%?” – I thought.

Ignoring other relevant factors at play, one key difference between the two classes is investing.

Only one in six Swiss invests money in the stock market in the 99% group³, contrasted by everyone in the top-1%. And that’s not for lack of possibility, as the Swiss boast the second-highest disposable income in Europe.⁴ Yet most, like Scrooge McDuck, keep it all in the bank.

Investing requires some knowledge, time, and discipline. Keeping those savings in the bank requires none, but guarantees to shrink your wealth over time, and keep feeding that wealth gap.

This article aims at reducing that effort as much as possible – at least for the startup phase – and make your willingness the only thing standing between you and taking action.

If you wish to inspect methodology or reproduce results, download the Research Package, which includes all data sources at the time of analysis. Research, writing, and review process of this content took ~50 hours by the involved parties.

Poorer?

Are you keeping your savings in a bank account?

You’re in good company. 3.6 Swiss hold money in a savings account for each one Swiss who has any sort of investment fund.³

You might think that you are “saving” by keeping that money in the safety of a bank. After all, whatever balance is on your statement today will stay there unchanged; heck, it might even grow a tiny bit through interest!

In fact, the opposite is true. Your money is actually waning:

• You lose money because an organization actively works to devalue your savings.
• The interest rates you earn from your savings are symbolic only, and fail to compensate for the money you lose for the effect above.
• You lose additional money because you fail to earn what you could.

Each of these effects affects you, so let’s look at them in isolation.

Inflation: The hidden tax

Inflation affects you because it takes away your ability to buy without you spending any money. That’s why it’s called hidden tax.

Look at the graph below, which shows the growth of Swiss prices over time (CPI).

If your parents set aside the money to pay your college tuition at your birth in 1980 (when CPI = 54 CHF), by the time you’re 18 and enroll, that money will cover less than 60% of your college tuition (when CPI = 91 CHF).

Your parents would think they’re “saving”, and the balance on their bank statement does numerically hold – but by the time the tuition has to be paid, that balance no longer covers your college: 40% has been lost. Their Money Bin was actually cracked: They haven’t leaked cash, but they have leaked purchasing power.

Yearly inflation in Switzerland has been on average 1.75% over the last 100 years, 2.2% over the last 50 years, and 1.1% over the last 35 years. Those halved people’s savings in 39 years, 31 years, and 59 years respectively. Once you managed to save 200'000 CHF, a 2% inflation costs you 4'000 CHF/year.

Let’s look at some real examples on people’s wallets. The chart below shows what happened to people born in different years who kept all of their savings in the bank. There are various assumptions in the graph – so don’t take each number exactly by the franc – but they mostly balance each other out, so the rough figures and comparisons are mostly accurate.

Now look up your birth year, and pick the line whose color is closest to your average monthly salary so far.

The gray line shows the total inflation which you incurred. That assumes people start earning by the age of 21 on average.

The colored line shows how much money (purchasing power) you have lost due to the actual, historical inflation as recorded by the Swiss National Bank. Data on income classes and their average savings is taken from the Swiss Federal Statistical Office, and inflation-adjusted for each year.⁵

Swipe your finger across the graph to your birth year to see exact numbers.

Notice that people born after 1980 appear to have incurred low losses. That is caused by two factors:

1. They only started working after 2001 and accrued minimal savings.
2. The years past 2008 collected 2x financial crises + COVID, causing outstandingly low inflation a decade long, which only started to change in 2021.

So that’s the past; what can you expect from inflation in the future?

The Swiss central bank strives for “price stability”, which they define as inflation “within 2%”. Most central banks claim more explicit targets, with the European Central Bank aiming to maintain an average inflation of 2%, and the American FED likewise.

Now hold on before shouting “New World Order!”: the reasons why they strive to maintain inflation are not too unreasonable:

• First, central banks need some room for maneuver to perform monetary policy. They must be able to increase or reduce interest rates if the economy crashes or runs too hot. More on this in the next paragraph.
• Second, people spend less when there’s no inflation, causing a dangerous cycle decreasing spending and salaries until recession. Essentially, a tad of inflation keeps your salary afloat, and avoids that rich folks sit on their pile of money and do nothing.

The take-home messages to this are:

• Inflation consumes your savings at a target rate of ~2% every year, or 33% every 20 years.
• Inflation is there to stay. Most central banks work towards that.

Interest rates

We live in the age of negative interest rates. Long gone are the 8% rates which banks paid you in the late ’80s. You now get the likes of 0%, or even negative.

Why is that? Banks do continue to loan out your savings to others for a healthy profit, just like before. Why don’t they share any of those gains with you anymore?

Again, the central bank is behind that.

They define a reference interest rate, which drives the interests that your bank pays to you. They do this with the noblest intentions to protect social stability and people’s livelihoods.

When the economy is too weak, businesses make no earnings and fire workers to save costs and survive. More jobless people causes less spending, causing more businesses to struggle and more workers laid off.

A vicious cycle which the central bank breaks by lowering interest rates, pushing people to temporarily spend more and giving oxygen to the economy.

When the economy is too exuberant, businesses are bullish and invest aggressively to grow. If too much debt is built up and an adverse event strikes, they may fail paying back their debt, making their lenders go bankrupt, their suppliers being left unpaid, and unable to pay their own debt.

Another vicious cycle which the central bank breaks by raising interest rates, pushing people to take on less debt.

All in all, average interest rates have been < 1.5% for the most part since 1997. They generally grow when stability and confidence in the future are strong, and neither of these conditions are in sight.

Globalization and automation maintain fast change to every developed economy, and they are not going away any time soon – regardless of government or monetary policy. This is not necessarily bad: we must simply adapt to the new environment, which made “agility” and “innovation” a survival feature for every company.

The take-home messages to this are:

• You are getting no money from the savings you leave in your bank account.
• This effect is proactively driven to protect society from the change incurred by globalization and automation.
• The situation has been such for decades and there’s no indication that it will change anytime soon.

Opportunity Cost

We looked at how inflation and low interest rates suppress your savings over time.

There’s an additional cost to account for – coming from a powerful, generally-applicable concept: Opportunity cost.

Opportunity cost is the money you lose because you don’t earn it.

Let’s say you just completed your university studies with specialization in eye medicine. You could go on to work as an ophthalmologist and earn your median salary of 40'000 CHF/month.⁶ However, you really like ice cream and decide to make and sell your own ice cream instead – which brings you a net profit 5'000 CHF/month.

• “Ice cream makes me 5'000 CHF/month !” – you say as a passionate ice-cream maker.
• “Ice cream costs you 35'000 CHF/month !” – say your parents as conservative baby boomers.

Your parents see the opportunity cost, and if that’s difficult to grasp, here’s another example.

Say you own a flat, and your tenants suddenly stop paying the rent. Would you activate yourself to get them to resume paying? If you do, it’s because you consider the situation as a cost: even though no money is leaving your bank account, it is failing to come in. You are acting to fix the opportunity cost.

How does this factor apply to your savings?

When you keep your savings in your bank account, you not only “actively” lose money through inflation. You also “passively” lose money by not earning what you could have if it were invested. How much of it?

• A traditional “worker” investment long-term in the swiss stock market yields you a gross 8% on average.⁷
• A conservative “pensioner” investment – build to withdraw money regularly no matter what happens in the economy – yields net 3-4% on average.⁸

So depending on your situation, that’s the amount you can assume to lose. Year, after year, after year. A 3% growth would double your savings in 25 years; an 8% growth would double them in 9 years.

Conclusion

“Savers” are not really saving after all.

Keeping savings in the bank is the most popular choice for the Swiss – and this only makes people bleed their hard-earned savings and amplify the wealth gap.

Why this inefficient choice is so popular boils down to three reasons:

1. They regard the bank as the safest place for savings, with alternatives being risky. ✅
2. They are unwilling to invest time for understanding alternatives.
3. They fall short of executing after they did decide for alternatives.

With this article, we dispelled the first concern. Your bank loses 1-2% of your hard-earned cash by the year through inflation, purposefully maintained by the central bank to smoothen the economy.

The next article looks into what can be done to address this problem: investing. “Risky, difficult and superfluous” are common associations with that – and we’ll look into each.

Glossary & essential concepts

CPI

Consumer Price Index, an indicator used to measure inflation. It’s computed as the weighted average of the prices of a large set of commonly-purchased items.

Discretionary income

The amount of money left for you to spend after all basic necessities (lodging, food etc) are covered. It’s disposable income minus the cost of basic necessities.

Disposable income

The amount of money left of your paycheck after you paid taxes. Compare with discretionary income.

Inflation

The progressive increase of prices to buy the same goods. This reduces your ability to buy stuff with your money over time, despite your bank account balance staying unchanged. The inflation at time t is measured as $ CPI_{t} := CPI_{t} - CPI_{t-12months} $.

Opportunity cost

The cost of making one choice, in terms of how much less (money) this choice produces when compared with the best choice you could possibly make. Fictional example: You have 10'000 CHF available to invest. The stock market is your best choice and yields 8% yearly on average, which would make you 36'609 CHF over 20 years. However, you choose to keep the money in your bank, which gives you a 0.05% interest, making you 1'049 CHF over 20 years. The opportunity cost of keeping the money in the bank is 35'560 CHF = 36'609 CHF - 1'049 CHF.

Purchasing power

The ability of your money to purchase goods and services. Inflation reduces your purchasing power: while the amount of money – as in number of dollars – stays the same, you can buy less with it – which is ultimately what you care about. For details, see purchasing power.