Question

Question 2
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Mrs Kruger has just retired from her teaching job of 45 years. She has been awarded a retirement lump sum payment by her employers amounting to R800 000-00. She realizes that she does not want to make use of whole amount at once and decides to keep it with her bank in a zero interest account. Her son Juste argues that this arrangement with her bank is unfair to her and advices her to move this money to another account. Provide reasons and discuss why her son Juste believes that keeping money in a zero interest account is not beneficial to Mrs Kruger.

Answer 1

All the reasons of why interest is paid to a depositer are the reasons why zero interest account is not beneficial to Mrs Kruger. These reasons are mentioned below:

1. Hegde against inflation: As we all know, if inflation is positive, it means prices of goods and services are rising over the time. Thus, it is better to consume now than later as even with the same amount, our goods and services would be less if we would have waited for future. Thus, inflation is bad for a saver. If saved the amount in zero interest account, inflation would reduce the value of those money. But if bank pays certain money on top of that, then it would help in guarding against the inflation.

2. Present consumption is more rewarding than future same consumption: Even if inflation is 0%, one would get more satisfaction by consuming that good today than in future. If I want to have a bread and I can afford 1 bread now, then there is no point waiting for a year and then consuming that 1 bread only. I would be better off using that today itself. Thus, I should get something extra on excess of inflation.