Besides rolling up your cash and lighting it on fire, there’s actually one thing you can do that is almost as bad. Now, when it comes to speed of waste, nothing beats rolling up your cash and lighting it on fire, but believe me, this decision that I’m going to tell you that too many people make is almost just as bad. It’s the second worst thing. What is it? Putting your money in the bank permanently. Seriously.
You might be thinking that this is a joke blog post. I mean, what’s so bad about putting money in the bank? Isn’t that the kind of behavior people should be rewarded for? Isn’t that a positive thing that instead of just eating or wasting your money or spending it on junk, you set it aside and you put it in the bank? That’s savings. Why am I saying that this is the second worst thing you can do to your money?
Well, pay attention to what I said. I said, putting your money in the bank permanently. Unfortunately, a lot of people have so much trust in banks that they think that somehow, some way, their banks would magically transform their money into a bigger pile of cash down the road. That doesn’t work.
Why? First of all, we live in a low interest rate environment. This has been going on for a long, long time now. You’d be lucky if you find a bank that would pay you north of 4% a year. It’s not uncommon to find banks that pay a measly 1%.
To top it all off, whatever interest income your money is able to manage to earn is taxed by Uncle Sam. That’s right. You’re not only making peanuts for your hard earned dollars, you’re also getting taxed by the government. Talk about adding insult to injury. Still, people think that the safest place to put your money in is in the bank.
While it’s true that the bank is definitely safe as far as robbers are concerned, when it comes to the real killer of your money, your bank completely leaves you unprotected. Seriously. The big killer of savings is inflation.
Year after year, due to government monetary policies (read printing paper money or issuing digital currency by the government), the amount of money supply in any economy continues to grow and grow. You don’t have to necessarily be an economist to understand that if the supply of any kind of commodity is high and the demand remains stable, the price of that commodity drops. The same applies to money. Its value drops. And that’s why year after year, it’s able to buy less and less goods and services.
Now, granted, on a year to year basis, you probably won’t feel much difference. Maybe in the previous year you paid $3.50 for a burrito and now you’re paying $3.60. It’s not that big of a deal. But given enough time, you’d be shocked as to how little you can buy with today’s dollar.
If you still have a tough time wrapping your mind around what I’m trying to say, I want to remind you that in the 1930’s, you can buy a house for a few hundred bucks. That’s right. You can buy a complete house, including a front lawn and a garage for a few hundred bucks. In fact, in certain parts of the United States, you can buy it for a couple of hundred dollars. That’s how bad inflation is.
Now, good luck trying to buy a house for less than $100,000. Do you see how this works? Inflation is bad news. And this is why I can say with a straight face and with all seriousness that putting your money in the bank permanently will kill your savings. If you wait a long enough time, it’s as if moths have eaten your pile of cash. Bad news.
The Bank Doesn’t Offer Too Many Options Either
Now, you may be thinking to yourself, “okay, putting money the bank in a regular deposit account is a nonstarter, what about time deposits?” True, these accounts do pay a higher interest rate, but not by much. Given our low inflation and low interest environment, investing in time deposits is still a nonstarter. The interest is just so low.
Similarly, certificates of deposits are no help either. In many cases, they have lower interest rates than time deposits. The worst part to all of this actually involves losses on your part. That’s right. By simply putting your money is a certificate of deposit, you’re losing money. Why? Think of opportunity costs.
What if you invested that money in Netflix, for example? What if you invested that money in bonds that pay 10%? Do you see where I’m coming from? You take the same asset and you add time and you compare different returns you could have gotten at the end of the process. These different decisions have different consequences. This is why it’s a bad idea to save just for the sake of saving.
Again, I have nothing against people saving. It’s a great thing. You have to save because that way, you have money to grow. But you have to decide to grow it. In other words, you have to decide to invest it. Putting it in another way, saving without investing is a dead end. You might as well just resign yourself to the idea that your money’s not going to be worth much after a while.
Always remember this because anything bank related, as far as savings is concerned, is a dead end unless you use banks for the way they’re intended to be used. They’re there to just hold your money for those short periods of time when you are deciding what to ultimately do with your cash in terms of investment.
Use banks the way they are intended to be used. Don’t get caught in a bind. Don’t make the mistake of putting your cash in the bank and leaving it there permanently. That is a sure fire recipe for disappointment later on. Can you imagine putting money in a bank for 20 years when you could have put that money in Apple Computers right when Steve Jobs came back to the company?
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