How does inflation affect savers and lenders, and why is it important to consider interest rates when saving or lending money?
Answer (1)
Inflation is bad news for savers and lenders because it reduces the real value of the money they will receive in the future. If you save money in a bank or lend it to someone, what you care about is not just the amount you get back, but what that amount can actually buy.Let’s take an example. Suppose you put ₱10,000 in a savings account that earns 3% interest in a year. That means after one year, you’ll have ₱10,300. Sounds good, right? But if inflation during that year was 5%, then prices in general went up by more than your savings grew. So even though you have more pesos, those pesos can buy less than they could a year ago. That’s called a negative real interest rate.For lenders, the same thing happens. If you lend money to a friend or to a bank that pays you back with interest, and inflation is higher than the interest you receive, you end up losing purchasing power. The money you get back won’t go as far as when you first lent it.That’s why interest rates are so important when saving or lending money. To beat inflation, the interest rate you earn needs to be higher than the inflation rate. In the Philippines, banks sometimes offer low interest rates on savings accounts—like 0.25% or 1%. But if inflation is at 3% or higher, your money is actually losing value in real terms.Some Filipinos try to protect their savings by putting money in time deposits, mutual funds, or retirement accounts like the Pag-IBIG MP2 savings or SSS Flexi Fund, which often give better returns. Others invest in real assets like land or gold, which usually hold their value better than cash during inflation.In short, inflation quietly eats away at the value of money. That’s why it’s important to save and invest wisely—and always check if the interest you earn is greater than inflation.
