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We’ve all heard from our family and friends all the time that we should be saving our money. How come no one ever tells us to invest our money? Well, I have some statistics for you.
Most Americans, despite being annoyed to save money, have less than $1000 in their savings account.
And more than half of all Americans are not invested in the stock market.
But don’t take it from me, google it for yourself and you’ll see right away. So you being here and reading this post must mean that you’re either looking to keep or start saving or start investing your money or both, and I commend you.
Now to compare both of these options we must first understand saving and investing your money in detail.
The simplified formula of your savings is,
savings = biweekly income (for most jobs) – all expenses
For example, if you receive a paycheck from work every two weeks of $1000 and you spend $500 in various expenses, then you have saved $500.
Most people store their saved money in a savings account at a bank. And it pretty much stays there until they need it. They can withdraw that money whenever they want to purchase something for themselves or for others or simply keep it for a rainy day.
Also, banks pay you an interest for keeping your money in a savings account because it’s like a small loan you give to the bank. According to CNN, the average interest rate on a savings account here in the United States is 0.06%. To put that into perspective, if you had saved $1,000 in your savings account, over the course of a year you will have gained 60 cents from the bank. Sounds like a pretty lousy return to me. How come the banks don’t give us the interest rate that they get??
Anyways, you can keep money in a savings account if you don’t mind the 0.06% interest rate. If you keep money in your savings account for short terms, such as taking it every few months for Christmas presents and such, then it may not be such as bad idea. However, if you keep your money in a savings account for long terms such as a year or longer than you may actually be hurting your finances by just letting your money sit in the savings account. Let me explain further.
When we think about saving our money, we don’t often think about the inflation rate. Inflation is simply the annual percentage increase of goods and services in the country. According to tradingeconomics, the current inflation rate, as of November 2017, is 2.2% in the United States.
This means that now the prices for various purchases that you make will generally be 2.2% higher than the previous years. In other words, the money that you have now is worth 2.2% less than it was a year ago. The value of your money decreased since the same amount of money will be able to buy less than what it could a year ago.
Now going back to saving your money, if you plan on keeping your money in a savings account, that money will actually be losing its value. This is because you only receive a 0.06% interest on the amount you keep in the account. But the inflation rate is 2.2%! So your money is growing slower than the rate of the prices of everything. As you maybe able to see now, you’re hurting you finances by saving your money and piling it in the bank account, because it can’t keep up with the inflation rate.
How can you avoid this? Well that’s the fun part, investing! Now don’t get me wrong, saving your money is NOT a bad thing to do. In fact, you should be saving your money for various reasons. But now, let’s talk about investing your money.
Investing your money, particularly in the stock market, means owning a piece or stocks in a company. One of the main goals of a publicly traded company is to bring in large profits for its investors. Contrast to saving your money in a bank account, you invest your money by putting it in a brokerage account.
Once you have a brokerage account, you can begin investing your money in different companies. You can choose to invest your money in stocks, index funds and more. To keep it simple, we will just consider investing your money in an index fund.
Now, let’s say you did a little bit of research and invested $1000 in a decent index fund. Let’s say that index fund performed fairly well and its price increased 6% over the course of a year. Then, the $1000 that you invested the previous year would have grown to $1060.
To counteract the inflation rate, your money only needed to grow 2.2% to keep up, however it greatly surpassed that and grew almost 4% more. But if you would’ve picked a bad index fund that didn’t grow by at least 2.2% or at all, then the value of your money would have decreased.
As you can see, investing can be risky. Your money could decrease in value or you could lose some or all of it. However, if you do it right, the return or profits on your investment can far outweigh the risks.
Related Post: How to Start Investing in the Stock Market
In comparison, saving your money in a bank account can be fine if it’s short term. But, saving may not be the best option for long term. The risks associated with a savings account are almost none. Up to a $250,000 limit per account at most banks, you are guaranteed you won’t lose your money.
On the other hand, the money in your brokerage account that you use for investing can all be lost. However, if you are careful, do research and invest strategically you can substantially grow your money, far surpassing the interest rate that banks offer and the inflation rate as well.
I hope you enjoyed this post and found it useful. Feel free to leave a comment if you have any questions or anything, I’ll be glad to address them! Also if you enjoyed reading this, then consider subscribing to Parhelia Finance’s email list below and feel free to pin it on your Pinterest account as well!