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Your Savings in the Bank are Losing Money
Sunday 24, June 2018

Your Savings in the Bank are Losing Money 

MarianP

Your savings in the bank are losing money every day. Keeping your savings in cash is one of the fastest ways to burn a hole in your net worth. This applies to many repurchase agreements (repos) as well. By ignoring the rate of inflation or accepting sub-par returns on your investment, you are reducing the future value of your investments. It’s also important to note that interest rates on lower risk U.S. dollar investments are now higher than interest rates on Jamaican dollar investments.

To calculate how much your savings are costing you, look at the rate of inflation. If you are saving in U.S. dollars, your U.S. dollar savings are losing roughly 2% of their value each year.  That means that US$10,000 in 2018 will be worth US$6,730 in 2038. That is a 33% decline over a 20-year period. If your money is on a repo earning 2%, it is also just breaking even. On average, over the last 16 years, your Jamaican dollar savings in the bank lost 9.3% per annum excluding the impact of devaluation.  Inflation is a very important metric for quantifying the return on your investments and for valuing any future stream of cash flows.

A small difference in rate, makes a large difference over time.  You may think that 3% or 2% don’t sound like much. However, these small differences make a big difference over the medium to long term. For example, if my US dollar repo investment is earning 2%, I may be ignoring the fact that I could be earning 6% on a medium-term bond issued by an investment grade company. The math shows that 4% compounded over 10 years increases your principal by 49%. For example, US$10,000 earning 4% each year will become US$32,433 at the end of 30 years. Don’t ignore small differences in the rates of return on your investments. 

Back in January 2009, the 3-month BOJ Treasury Bill yielded around 22.3%. At the most recent Bank of Jamaica (BOJ) Treasury-Bill auction in June 2018, this yield was recorded at 2.54%.  Sovereign yields have also declined quite significantly. Today, 11-year Government of Jamaica (GOJ) Jamaican dollar paper is yielding just over 5%. Interest rates are at historical lows in Jamaica. Jamaican dollar liquidity levels are also higher thanks to the absence of Sovereign issues in the local market. Indeed, these conditions are prerequisites for economic growth and the Bank of Jamaica has successfully created an environment that no one thought was possible.  However, investors are now challenged to find higher yielding investments without a corresponding increase in risk.

Don’t ignore inflation in your return calculation and most of all, don’t accept lower returns on your investments. The good news is that there are instruments available with HIGHER yields and at LOWER risks than those available locally or regionally. 


Marian Ross is an Assistant Vice President of Trading & Investment at Sterling Asset Management. Sterling provides financial advice and instruments in U.S. dollars and other hard currencies to the corporate, individual and institutional investor. Visit our website at www.sterling.com.jm Feedback:  If you wish to have Sterling address your investment questions in upcoming articles, e-mail us at: info@sterlingasset.net.jm

 

 

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