Savings and investing
Money
In our first three articles, I talked about money myths, truths, and controlling your money. Now we are going to move on to two of the fundamental ways of handling your money that will benefit you for years to come. The money you save or invest is like your children, growing each year. Today we will look at these two fundamental ideas, savings and investing.
Savings
When I think of saving, I think of either putting the excess money under a mattress, somewhere in the house or a bank. But, before we go deeper into these two ways of savings, you need to understand two trends in our life.
Inflation.
The first one is inflation. Over time, goods and services cost more each year. This year inflation is going to rise by close to 10%. That means, in simple terms, that something you bought for a dollar last year will cost one dollar and ten cents this year. Of course, inflation goes up and down each year, depending on many factors in our economy. But, in general, inflation is almost always positive, so things cost more each year.
If the thing doesn’t cost more, the manufacturers have made the amount you get for the same price smaller. So prices rise and fall, but generally, the trend is positive inflation.
The second trend is the growth of your savings or investment over time.
If you put money under your bed or in a jar, the money will buy less five years from now because you don’t have more dollars than you had when you put it in the pot. So the dollar you put in the jar this year is only worth 90 cents next year because we had 10% inflation. So if you want your money to grow as your children grow, it needs to grow at a higher rate than inflation.
The concept is called the buying power of your money. For example, if you stuff your dollars in a jar or under your mattress, the buying power decreases over time, and you can buy less because the cost of things has been affected by the inflation rate.
Savings in a bank
When I was growing up, we were encouraged to get a savings account at a bank as soon as possible because the bank would pay you interest for using your money.
The problem is that the bank needs to earn more than they pay you, so if you borrow from them (loans, credit cards. Mortgages), they will charge you a higher rate to let you use their money than they will pay you in interest. This is why banks have big elegant buildings and offices.
Today bank savings rates are .01 to .08 percent in brick-and-mortar banks and 1.3% to 1.5% for online banks. Online banks can pay higher because they don’t have the overhead costs for physical property.
So, you are, in fact, for this year losing 8.5% of the future purchasing value of your dollar if you put it in a savings account.
Certificates of deposit at your bank
This is another means of saving at a bank, but they require you to start with more money. Here is the current rate schedule for Wells Fargo bank, as a representative for the banking industry. There historically is a difference in the rates paid for savings and CDs, but that is not the case today. The rates are consistently .01%.
The conclusion here is that savings, either under your pillow or in a bank, won’t let your money grow as fast as your children. So, is there an alternative? Luckily, the answer is yes. That is investing.
Investing
Investing is taking your excess money and letting someone make it grow for you.
There are many ways to invest your money.
- Buy a house
- Put money in the stock market
- Buy land
- Invest in gold or silver.
- Invest in bitcoins.
And many others.
Tomorrow we will look at investing and the concepts of risk, reward, simple, and compound interest.
