Why keeping your money safe can make you poorer
Keeping money in the bank is usually associated with financial security. We know exactly how much we have; the money is readily available when we need it; and unlike stocks or property, we do not see its value rising and falling every day.
But there is another kind of risk that is less visible. While the amount of money in our account may remain the same, what that money can buy can gradually decline.
In the previous week, we discussed in this column how Philippine banks held about P7.49 trillion in savings deposits, which represents about 41 percent of total peso deposits. Some of this money is kept in savings accounts for emergencies and immediate financial needs, but some may also represent money that households have accumulated and simply left in the bank.
According to Philippine consumer price data, the consumer price index increased from about 50.2 in 2000 to 128.2 in 2025. This means that something that costs about P392,000 in 2000 would cost roughly P1 million by 2025.
So, if you had P1 million in 2000 and simply kept that amount until 2025, the P1 million would buy you only about 39 percent of what the same amount could buy 25 years earlier. The number of pesos may not have changed, but the purchasing power of your money declined considerably.
Of course, you could argue that if you had kept the money in a savings account, you would have earned interest over those 25 years. This is true, but the interest you earned could have been eaten away by inflation.
This relationship between interest rates and inflation was explained by economist Irving Fisher of Yale University in his 1930 book, “The Theory of Interest.” Fisher showed that the interest we earn does not necessarily translate into an equivalent increase in purchasing power because inflation reduces the real return on our money.
For example, if your savings earn 2 percent but prices increase by 4 percent, your account balance may still be growing, but in real terms, your purchasing power would be declining by about 2 percent.
The same principle applies to long-term fixed-rate bonds. Suppose you lock in a 7.65-percent return for the next 10 years. You may know exactly how many pesos you will receive, but you cannot know how much those pesos will be able to buy years from now. If inflation averages 5.25 percent, you would still earn a positive return, but much of the interest would simply compensate for higher prices. In real terms, your return would be only about 2.4 percent.
This is why money can sometimes give us a false sense of security. Because we continue to see the same number of pesos in our account, we may feel that our wealth has been preserved even when those pesos can buy less than before.
Economists sometimes describe this tendency as “money illusion,” where people focus on nominal amounts rather than their real value. Research has found evidence that people do not always fully account for inflation when making financial decisions.
This also raises a more fundamental question about what money actually represents. The Philippine peso, like most currencies today, is fiat money. Its value does not come from the material from which it is made. A P1,000 bill is obviously not worth P1,000 because of the paper used to produce it.
We accept the peso because we can use it to buy goods and services and settle financial obligations. This makes money useful as a medium of exchange and a source of liquidity, but the amount of goods and services those pesos can buy can change considerably over time.
This does not mean that keeping money in cash or savings accounts is bad. We need readily available funds for daily expenses and emergencies. The problem comes when money that is not needed for these purposes remains in low-yielding accounts for many years simply because keeping the principal intact feels safer.
This is one reason people invest in assets. If you bought land 20 years ago, you would still own the same physical asset today, but its peso value could have increased considerably. When you buy shares, you acquire ownership in businesses that generate revenues and profits.
Investing, of course, brings risks. Land does not always appreciate; stock prices can fall; and businesses can lose money. But money not needed for many years can be invested for longer-term growth and to help preserve its purchasing power.
We should, therefore, be careful about measuring financial progress simply by the number of pesos we have accumulated. Having P2 million today does not necessarily mean we are twice as wealthy as someone who had P1 million years ago because the purchasing power of the peso changes.
Money is valuable because of what it allows us to buy. Keeping it safe is important, but over the long term, we should also consider how much those pesos will actually buy.
Henry Ong is a registered financial planner of RFP Philippines. To learn more about investment planning, attend the 119th batch of RFP Program in January 2027. To register, e-mail at [email protected].
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