How Much Money Should You Keep in the Bank?

 

Introduction

In today’s day and age, most individuals who are employed at various nodes in the economy have some level of limited income. This income they have to allocate to various facets of their lives, including their bills, education fees, cost of raising children etc. After these expenses have been met, you are left with some amount, which you can split up into your savings and your disposable income.

The amount you allocate to your savings you are likely to deposit into a bank account or invest in similar facilities such as fixed deposit (FD). You could also opt to invest in the HDFC LIFE Sanchay Plus, a savings plan. As we will see further in the article, putting your money in a bank account could be causing you to miss out on several opportunities to maximize your savings for the future.

The concept of opportunity cost

If you have ever sat through an economics lecture, it is likely that you are well versed with the idea of opportunity cost. In its simplest terms, opportunity cost is defined as the next best alternative forgone. Meaning, in order to pursue one investment, you give up another potential investment. This is inevitable; every transaction we make, or action we carry out has an opportunity cost. The goal then, is to ensure you are minimizing your opportunity cost while you invest savings, in order to ensure you are getting the most out of your money. Most would opt to open and invest savings of theirs in a savings account with a bank, due to the security it offers.

Given the extended tenures of services such as FDs, this means the interest you earn is susceptible to inflation, and in some cases, you could also find yourself with technically less than when you opted to invest savings at the beginning of your tenure.

Also Read: 14 Best Investment Options In India

The solution?

The fact that FDs and savings accounts have high opportunity cost does not negate the advantages they offer. Therefore, the case can be made that you should allocate some percentage of your funds to a savings account or FD. Some experts estimate this amount to be 6 months of your living expenses.

However, in order to minimise the opportunity cost and increase returns, there are other investment avenues you could explore in order to start investing your savings for the future.

Equity Mutual Funds:Mutual funds have a wider investment portfolio that can help mitigate the risk of price fluctuations Investing your money in mutual funds could net you more returns.

Bonds: Bonds offer a lower level of risks when compared to individual stocks. However, since they are still not completely secure, you could be better off investing in bonds through ETFs. This way you ensure that your portfolio is managed well, and the risk is further mitigated.

Stocks with high dividend: While the prices of stocks tend to be more volatile, investing in stocks that offer routine dividend payments will ensure that as long as you hold the stock, you get a payout. This could help reduce opportunity cost and increase your savings for the future.

Conclusion

Depositing money in a savings account has a number of benefits such as increased security, reduced risk, and the fact that it is a liquid asset by nature, meaning you can withdraw funds as and when you need it, while other investments might require a number of transactions to liquidate.

However, there are a number of benefits to diversifying your savings portfolio to include various other investments such as the HDFC LIFE SanchayPlus, which could help you increase your savings for the future.

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