Impact of Inflation on a Savings Account

A savings account is a bank account in which your balance earns interest. This is good in comparison to a chequing account, where generally you would not earn any interest. However, keeping a high balance in your savings account may not be a good thing. The main reason for this is that over time the value of your deposits in a savings account actually decreases due to inflation.

In Canada, the average inflation rate for the last 10 years was 1.54%. This means that on average, every year you are paying 1.54% more for the goods and services you consume. For your money to have the same value from one year to the next, it needs to grow at the same rate. The problem is that most savings accounts in Canada do not have an interest rate that matches the rate of inflation. In fact, none of the top five banks in Canada are close to giving you an interest rate close to the inflation rate. They all tend to range, excluding any promotions or additional conditions, between 0.5% - 0.7% (TD 0.5%, BMO 0.55%, RBC 0.65%, CIBC 0.65%, Scotiabank 0.7%). This means that every year, the value of the money in your savings account could be decreasing, depending on the interest rates that your bank provides, between 0.8-1%. The magic of compounding interest is working against you! It is important that you pay attention to both the interest rate you are getting and the inflation rate to see whether or not your money is actually decreasing in value over time.

This concept is not only applicable to Canada. Wherever you may live, if your money is growing at a rate that is lower than inflation for your country, you are losing value. This can be prevent by investing or ensuring that your money is growing more than inflation.

Notes: 1) There are in fact some banks (generally smaller or online banks) that will have an interest rate that is equal or higher to the inflation rate. 2) The 1.54% average inflation for the last 10 years was from the Bank of Canada’s Inflation Calculator tool. http://www.bankofcanada.ca/rates/related/inflation-calculator/