Save your future. Save it by not saving for it. Doesn’t sound right does it, but it’s good advice. Don’t get me wrong, everyone should have enough in their savings account to cover four to six months of living costs and expenses, but not a penny more.
The interest rate on your savings account is laughable, that’s the only word for it. Have you looked lately? My guess is it’s probably somewhere in the .05% range, that’s one-twentieth of a percent. If you have 10k in the account, you’ll earn a whopping $5 in interest for the year. Better than nothing, but barely. You really shouldn’t have a traditional savings account at all.
Having a high-yield savings account isn’t much better, you should however have your emergency fund in one. They all tout the line of having 2x, 3x, 5x the national average! The best I can find is about .85% and that’s great as far as savings accounts go, but still not cutting it. Even working with the .85% rate, that gives the same 10k balance only $94 interest a year. Saving money here is better, but not nearly enough.
Do you know who benefits from the balance in your savings account? It’s not you, it’s the bank. The bank takes the money you work hard for and uses it to make their profits. You just hand it over to them. They use your cash to give out loans to other people and collect the interest. You work hard to save money, so your money should work for you, not them.
As if that wasn’t enough, by saving money with the bank, you are actually losing money. Yes, you will watch the amount of money you have go up, and you’ll feel good, but you shouldn’t. The reason you’re losing money is inflation. Inflation is what causes the price of goods and services to rise over time. What that also means is it reduces the value of your money. In a healthy economy inflation typically rises 2-4% a year. That means your 10k today will be worth roughly the same as 8k in 10 years. The interest rates on your savings accounts aren’t keeping pace.
So, if you’re not saving for your future, what should you be doing? The answer is, you should start investing. There are different numbers out there on the historical return of the market, but the low end is about 7%. Quick math says that the 7% from the market not only blows any savings account out of the water but will outperform inflation as well. This is how you grow your money and wealth.
Here’s a graph of the growth of 10k, I’m not going to even include the traditional savings account.
As you can see, the high-yield savings account (HYSA) grows, but it’s not keeping up with inflation, therefore hurting your financial future. What you can also see is that the 7% average return with the market is way ahead of both. We’re only looking at 10 years here, but the math only gets better with time. The power of compounding gains can’t be overstated. Yes, the stock market will have its ups and downs, but over the course of 20, 30 or even 40 years you’ll only find your wealth is growing faster and faster.
Everyone has to get started investing somewhere. You don’t need to start with a lot, or by picking stocks, in fact, I would start with mutual funds. Although you’ll see smaller returns, you’ll drastically reduce your risk. Find one that invests in an industry you believe in and you’ll be fine. If you really want a low stress investment, start investing in an index fund. These are mutual funds that invest in a collection of stocks designed to follow the market. A simple S&P 500 index fund is a great place to start investing and to see its value. If you do want stocks, make sure to pick well establish companies that aren’t going anywhere since you’re not likely going to find the next Amazon or Netflix on your first try (or probably ever for that matter). Once you do take the plunge, don’t stop, make sure to setup automatic investing. Doesn’t matter if it’s $25, $50 or $100 a month, get it in there and start saving your future with investing!
Jeff is a fan of all things finance. When he’s not out there changing the world with his blog, you can find him on a run, a Mets game, playing video games, or just playing around with his kids.