Have Cash or a Savings Account? You’re losing $$$
Let’s help you understand some important financial concepts
Brief Answer: The rate of inflation undermines the value of your cash. Let’s assume you have $2.00. If your favorite candy costs $1.00, based on the average annual inflation rate (3.22%), that candy will be worth $1.03 next year. But notice how you still have $2.00? Your money is worth less than it was last year.
Grocery inflation in a picture.
Long Answer: Whether your parents made an account for you or you made one yourself, it is vital to know the consequences of having a savings or checking account. The purpose of this article is not to degrade the credibility or deny the ease of use of an electronic account, but it is rather to inform you, the customer of the bank’s services, what happens to your hard earned money.
Before we start our explanation, let’s get some obligatory statements out of the way:
I am not a financial advisor. Any or all information I provide in this article is for education purposes only to give you a better idea of how the financial system works.
Take everything written with a grain of salt, and make sure to do more of your own research before making any financial decisions. Your financial gain or loss will be due to your own due diligence and financial understanding. Be smart!
There. Now, having that said, lets dive deeper into why a savings accounts *technically* might be a bad deal. Before we do so, let’s help you understand some important financial concepts:
Inflation: Yes, this is a real phenomenon. To give you a bite of how inflation works, consider the price of a McDonalds BigMac. The burger you love and enjoy used to be a measly $0.49 in 1968. Today, the same item is $4.79. Inflation is defined as the increase in prices and decrease in the value of money over any given period of time.
Interest: Money paid regularly at a particular rate for the use of money lent, or for delaying the repayment of a debt. This is a perfect rate that most of you have seen or dealt with in the past.
APR: Annual Percentage Rate of charge. Most savings account have somewhere on average a 1% APR set on their accounts. Usually the more money you put, the APR slightly increases. Lets say you put $1000.00 in your savings account. At the end of the year the value of your account will be $1010.00.
The bank is incentivizing you to have you store your money with them. So with daily compounding, every day the amount that earns interest grows by another 1/365ths of 1%.
At the end of the year, the deposit has grown to $1,010.05. Essentially, banks assume you know what inflation means, and give you a little bit of money so your capital’s value stays in tact.
But how are you losing money? Take a look at the historic inflation rate below:
This picture illustrates the value of 1913 dollar, in 2003. Started from $1.00, and was worth $.05 in 2013
A picture says a thousand words and the illustration above depicts the value of a dollar as it depreciates in a hundred years.
To put into perspective, if historic averages stay in tact, if you have $10,000 of cash in your hands in 2018, by the year 2050 the value of that cash will depreciate to $6116.63. This can be calculated easily given a 3% annual inflation rate. Doesn’t that scare you?
Now, critics might say that a bank pays them a 1% APR, so its not a bad deal after all. But lets do some basic arithmetic: 3% -1% = 2%. That right there is a loss of 2% of your hard earned money’s value over a year’s time. Even if you are earning a little bit of interest, in the long haul, you are still on the bad side of the deal.
This is a simple yet powerful concept.
No one likes losing money.
Not to worry! Grace Hopper, a scientist and United States Navy Veteran (and my personal idol), once said something very meaningful:
“The most dangerous phrase in the language is — we’ve always done it this way.”
Your financial understanding and progress starts with taking the first step towards your goals.
Growing your $$$ with the US Economy?
The S&P500 is probably the most accurate depiction of the United States economy. Why not grow your money with the economy? Whether you do or do not have experience trading in the past, a simple technique to grow your money and counteract the effect of inflation would be to start investing.
The S&P 500 ETF Historic Reference
While I would definitely recommend spending a reasonable time learning how the markets operate and how the S&P 500 ETF specifically works, you could give it a try by investing a small amount as an experiment to see what happens.
If you like to take a dive in learning approach, this might be a good idea now that your money is in the market, you will be more motivated to gain financial education. If not the S&P 500 , I would encourage you to look into conservative (not very risky) investment routes to ensure you do not lose any more money.
Trying not to digress from the topic at hand, I would like to mention never to invest without knowing what you are investing in. Would you buy a candy knowing it tastes bad or there is something wrong with it? I hope not. Do your research on what you invest in!
No lie, you and I both get a free stock (usually only worth a couple dollars. But who doesn't want some free money?). If you are interested in taking advantage of the S&P 500 ETF, the ticker for that is SPY. Nevertheless, here is another great article to help you understand how you can make your first investment.
While it is important to save your money, make sure you know you are losing money keeping it idle in the bank or in a bag of cash under your bed.