You’re on the right track. You’re budgeting, you’re spending less, and you’ve trimmed your bills. You’ve automated your savings and haven’t dipped in even once. Go you! About that, though. I hate to be the bearer of bad news, but I’d be doing you a disservice if I didn’t tell you: you might be losing some serious money. I talk to so many people about investments. Anyone who will let me without their eyes glazing over, in fact. We’ve seen our share of market crashes over the past 20 years, so it’s no surprise that the majority of people I chat with are terrified of the stock market. I understand the concern. You want safety. You remember the dot com bubble of 2000 and the housing bubble of 2008. You play it safe with government insured savings accounts, treasury bonds, and CDs. But what if I told you that those investment vehicles can be riskier than buying shares of some great companies? The threat of losing money is pretty likely, and I’m not just talking about opportunity cost.

Stacking Money In a Regular Bank Or Credit Union Is Unwise

But in a bank, my money is insured, you’re thinking. What a lunatic. Before you write me off as crazy and navigate away from Bottom Up, hear me out. The risk to your money is inflation, and ladies and gentlemen, it is not just this distant concept you slept through in Economics. It is a real thing, and it can make the difference between financial security and panhandling in retirement. Whomp, whomp. While it’s still great that you’ve got this chunk of money that you wouldn’t have had you not delayed your gratification, it’s been slowly but surely eroded through that nasty inflation. Not only was all your interest earned eaten away, but you have $136.68 less purchasing power than what you actually saved. Compounded longer and contributing regularly, the devastation to your purchasing power is even more profound.    

Even Investor.gov warns: “Savings accounts, insured money market accounts, and CDs are viewed as very safe because they are federally insured. You can easily get to money in savings if you need it for any reason. But there’s a tradeoff for security and ready availability. The interest rate on savings generally is lower compared with investments. While safe, savings are not risk-free: the risk is that the low interest rate you receive will not keep pace with inflation. For example, with inflation, a candy bar that costs a dollar today could cost two dollars ten years from now. If your money doesn’t grow as fast as inflation does, it’s like losing money, because while a dollar buys a candy bar today, in ten years it might only buy half of one.”

How Inflation Makes You Lose Money

Here’s what happens when you put $1000 into the broad index that is averaging an 8% annual return, vs a savings account (or CD, or similarly-yielding) and let it compound for 10 years at 2.5% inflation.

Savings vs. Investment

8% Investment

1% Savings Account

Starting Balance

$1000.00

$1000.00

Dollar Amount At 10 Years

$2219.64

$1105.12

Value In Today’s Dollars

$1733.98

 $863.32

Net Gain

+$733.98

-$136.68

Whomp, whomp. While it’s still great that you’ve got this chunk of money that you wouldn’t have had you not delayed your gratification, it’s been slowly but surely eroded through that nasty inflation. Not only was all your interest earned eaten away, but you have $136.68 less purchasing power than what you actually saved. Compounded longer and contributing regularly, the devastation to your purchasing power is even more profound.

Should Savings Accounts Be Outlawed?

Now, this isn’t me saying savings accounts, CDs and bonds are evil all the time. In fact, if you are saving for a shorter term goal, such as buying a house, the stock market is most likely not a wise place to put your money, especially if you don’t know what you’re doing. But when you’re building wealth long term (which is the goal here, right?), either for financial freedom or retirement, these “safe spaces” for your money are simply not as safe as most people believe.

Ready To Build Some Real Wealth?

Wealth building tip: open your Roth IRA at a brokerage firm, not your bank. Most banks do not have the option to buy investments that will actually gain value over the years. For more on the benefits of a Roth IRA and my recommendation on where to open one, see the step-by-step-tutorial: How To Open Your Roth IRA (And Why You Need One).

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