You Cannot Save Yourself To Wealth
Saving won’t make you rich. Saving is just delaying gratification. It’s not an emergency plan, not a wealth plan. Instead of spending your money now, you’re saving it for some time in the future. You’re saving for a rainy day…
The problem is saving won’t make you wealthy. It won’t give you the ability to live your best life now. It won’t give you more time that you crave to spend with your family.
Why? Because to do those things, you must build, grow and maintain wealth.
Savings doesn’t build wealth because nothing that loses money will ever make you wealthy. You wouldn’t think of running a business that loses you money year after year, would you? So then why put your money in a savings account or any other account that loses you money, for that matter?
You’re asking yourself, “How exactly do savings accounts lose money? I can see on my bank statements that I’m earning interest.”
How do savings accounts lose money?
For the past 20 years, inflation has averaged 3.10% annually. Because inflation measures the rise in prices of goods, it tells you how much you’re losing in buying power every year. A dollar today will have about 96.9% of buying power a year from now compared to today.
For every dollar you put in your mattress, you will be able to buy 3.10% less with it in a year.
The situation is not much better with your savings account. According to savingsaccount.com, the average national rate offered by savings accounts is 0.04%. You’re not losing as much value as the mattress strategy at that rate, but you’re still losing money to the tune of 3.06% per year.
The best-listed rate on savingsaccount.com is 0.5% offered by Citi. Even at that rate, you’re losing 2.6% per year. Although the 20-year average inflation rate is 3.10%, there are signs inflation is on the move and could be accelerating in the next few years – making savings an even worse retirement strategy.
Unfortunately, the situation isn’t much better with other fixed income products. If you think that other fixed income products like money market accounts, treasuries, and CDs will fare better than your savings accounts, then you would be mistaken.
Why? Because all these rates are tied to interest rates fixed by the Fed, and since the Great Recession, we have been in a low-interest environment with the Fed lowering interest rates as the favored Washington D.C. strategy for kickstarting the economy. The pandemic-induced downturn ensured rates would continue to be low.
Interest rates aren’t expected to rise any time soon – and certainly not at any levels that would surpass inflation. Last August, the Fed indicated that it would keep interest rates low for the next five years, even if it meant letting inflation rise.
Low rates and high inflation are a recipe for disaster for savings accounts and other fixed-rate products.
Compare the returns on common fixed-rate products with inflation below:
Saving is not investing; it’s losing money.
Investing is building, growing, and maintaining wealth. Factoring in inflation, if you’re not growing wealth, you’re losing it, and putting your money in a savings account is a sure way to lose money.
To become wealthy, you must invest, not save.
Michael Foley, president and CEO of Humabilt Capital, oversees the entitlement process, funding, and operations for Humabuilt Capital. Mr. Foley has been a full-time real estate investor since 1995 during which time he has developed hundreds of single-family homes, townhomes, condominiums, and apartments. Mr. Foley started his investment ventures in Long Beach, California, and has expanded to Apex and Durham North Carolina. Mr. Foley is a graduate of the University of California at San Diego.