How idle money in your savings accounts make the banks rich

Money in your savings account gives you an interest rate of 4% per annum. (Except for a few banks like Yes, Kotak, IndusInd).

Most people keep too much money idle in their savings account much to their own detriment. Money in fixed deposits or liquid funds can easily as much as 8% with nearly similar liquidity.

Fixed deposits linked to savings account gives you exactly the same liquidity but twice the earning. Linked deposits are exactly like money in your account. You can withdraw by cheque and ATM.

So would you like to know how much you lost by keeping money idle in your savings account. Here is it. I will make some simplifying assumptions to explain the point

1. First check how much interest you got last financial year on your savings account. Usually these are credited twice a year and in some cases quarterly. Let this amount be INT. This should be sum of all your savings accounts

2. Next see what is your average monthly outgo from these accounts. Let this be OUT

3. Assuming interest rate on savings account is RATE.

Now assuming that you need an average balance of at least 2 months expenses in savings account and that you could earn at least 1.75 times the RATE on idle money elsewhere (Linked fixed deposits),

MONEY YOU LOST = (INT – 2*OUT*RATE)*(1.75-1)

Let me explain with an example

1. You earned 30000 rupees as savings bank interest, so INT = 30000
2. Interest rate is 4%. RATE = 4%
3. My monthly expense is 1,50,000

Then amount I lost is (30000-2*1,50,000*4%) * (1.75-1) = Rs. 13500.

This number is much larger for businesses which keep money idle in current account as RATE = 0% and interest earned is zero

You can change the months of security you find comfortable to find out how much your laziness is making the banks rich by. Have fun

P.S. : This incidentally is the CASA ratio that banks so zealously try to increase as this is the cheapest source of funds for them

So how rich did you make your bank last year. Let me know

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