Chapter 6.1, Problem 4R

To determine

To analyze: The reason for which it is not best to invest more amount in one account.

Explanation of Solution

Savings bank account money earns a modest interest rate of just 3.5 % a year (most of the time). Inflation is around 7 to 8 percent on average, and if it is remembered, the individual would actually get a negative (-ve) real return.

Real return = Return on money − Taxes paid − Inflation rate

As a result, the purchasing power is declining over time. If the excess sum kept by an individual in a personal savings account is very minimal, there will be no negative real return, but when the person keeps large amounts, it is a matter of concern.