Saving Money is Not Enough
Saving Money is Not Enough

By moneyredpill | MoneyRedPill | 5 Feb 2020


Let’s be clear: Yes, interest is effective. However, ~1-2% is not a sufficient rate to effectively accumulate wealth over time, let alone secure a comfortable retirement. And while high-interest savings accounts do exist for a reason and provide a service as part of your overall financial portfolio, they should not be the primary mode of building wealth and maintaining buying power over time. Here’s why:

Low interest rates:

Savings accounts, even those going by ‘high yield’ or ‘high interest’ savings accounts, are inferior to returns from equity (7-10%), real estate (~10%), and even bond markets (4-6%) alike. In order to maximize one’s returns, any of the aforementioned asset classes have historically been shown to yield significantly (even exponentially) higher returns over time. For example, an average retirement fund contribution of $500/month over 40 years at the long-term stock market return of 7% yields over $1.2 million. Conversely, if the same individual contributes the same $500/month over the same 40 year period, but in a ‘high-interest’ savings account; generously assumed at no greater than 2% (brick and mortars are abysmal), the same investment will only yield ~$367,000; roughly a third of investing in the market.

Capital Contributions:

Additionally, due to the historical precedent that one can expect higher returns from investing in the markets versus high yield savings accounts, this also means one wouldn’t need to contribute as much over time in order to reach the same (or even lower) target. This frees up would-be contribution capital during your prime working years for further investment diversity, keeping in savings for cash-on-hand, or spending on leisure; all at no expense to your future retirement fund’s health relative to a 100% savings strategy.

Tax:

One of the pillars of successful individuals is learning to work with and leverage tax law, when advantageous, wherever possible. For example, contributing to a Roth IRA can be tremendously advantageous over time, as one would only pay tax on any contributions made now (if at all, depending on your income). Consequently, the primary trade-off applies come retirement age, when you begin withdrawing from your fund tax-free. 100% of your Roth IRA retirement withdrawals (payments to yourself) are not subject to income tax. This is especially beneficial if you expect your income to be higher in the medium to long-term.

Inflation:

Inferior savings yields also result in not being able to keep pace with inflation. Therefore, by keeping a large percentage of your portfolio in cash (presumably in savings), you ultimately suffer from decayed buying power over time versus inflation (2.7 – 3% historically). Though $350k may now seem like enough on which to retire, in 30 years the same value will be worth disproportionately less than it is now.

We remain staunch advocates of traditional investing in equity, commodity, and real estate markets. We could even justify allocating a small percentage of one’s portfolio to higher-risk assets, like crypto, with high volatility and higher returns. As far as savings accounts go, be cognizant of their most practical function, but for your overall wealth-building strategy, seek greener pastures.


moneyredpill
moneyredpill

Check out our weekly briefing on Financial Independence at MoneyRedPill.com


MoneyRedPill
MoneyRedPill

Unrefined Financial Independence information for the unawakened Entrepreneur, Self-Employed, and Freelancer, deep inside you. Read our latest FI briefing on Crypto!

Send a $0.01 microtip in crypto to the author, and earn yourself as you read!

20% to author / 80% to me.
We pay the tips from our rewards pool.