Saving Money Is Not What It Seems
If you’re one of the fortunate people who is in a position to save money, then kudos to you. If you aren’t, then keep these points in mind when you find yourself in a position with extra cash lying around.
The concept of saving has inextricably linked to long-term wealth. Not to sound anti-bank, but this is a cold-blooded lie. I’ll try to explain why this is the case without turning this into an ECON 101 presentation.
1. What if I Open a Savings Account?
There’s one concept that has to be mentioned when talking about saving, and that word is inflation. Inflation, in its simplest form, is the devaluing of the domestic currency. Using the dollar in this example, imagine you bought a gallon of milk in 1960 for $0.49 and now you are paying $3.60 for that same gallon. That means in 1960, you could have bought 7 gallons of milk and ate tons of cereal for that week but now you only get one gallon.
While the inflation rate has fluctuated over the past ten years, the conservative estimate of the average rate of inflation is 2.24% per year.
I promise it only gets interesting from here.
Now, let’s say you have an extra $500 from putting up Christmas lights on your neighbor’s house from the Christmas season and have been looking for a way to spend it. Then, you stumble across a random ad for Synchrony Bank’s savings account and its 0.60% APY (annual percentage yield). You get excited because you think you’re making money while you’re sleeping. Who said generating passive income was hard? They clearly never tried hard enough.
Obviously, I’m joking. Simple math will tell you that the value of your dollar a year after you open the savings account would be the 2.24% of inflation minus the 0.60% of interest, leaving your dollar less valuable every year you leave it in a savings account.
While the idea of making money through savings accounts might seem appealing, the best method of protecting the value of your dollar would to be to actively invest.
2. Active Investing
Now, I’m not encouraging you to blindly follow my suggestions or take my advice. I am just trying to stop you from keeping your money under your mattress, away from the hands of the big banks.
The truth is, there are many methods of active investment. Options include stocks, bonds, cryptocurrency, real estate, and even using that money to create a business for yourself. While there is no guarantee of making money in the short-term, active investing will allow you to make money while taking inflation into account.
The two tips to keep in mind when investing are that if it seems too good to be true then it most likely is and if it’s too hard to understand, then it’s most likely not worth investing in.
