Why People Invest

Let’s take a trip down memory lane. Remember when you were a kid, and your parents taught you to save money in your piggy bank? As you grew into your teens and early 20’s, this may have naturally transitioned into saving money in a savings account at your local bank.
It makes sense. It’s safe, insured, and the perfect place to store your money. Such a great idea… right?
But the truth is, it’s really not. You see, saving your money is a great way to pay off debt, tackle loans, and build an emergency fund. But, it is the WORST way to actually grow your money for your financial future.

What is Inflation?

In fact, only saving your money (and not investing), is a guaranteed one-way ticket to losing money. How, do you ask?
  • Meet inflation: a double-edged sword.
Inflation is the increase in prices of goods over a period of time. And as prices of goods increase, the buying power of your money decreases. All goods and services we purchase experience inflation. Each year the purchasing power of every dollar you have decreases.
Look at the prices of any common everyday items you buy. The cost of milk, bread, gas, and rent are all more expensive now than they were five years ago. Let alone, 10, 20, and 40 years ago.
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In 2000, the average monthly rent in the United States was $602. Today, the average monthly rent for a one bedroom apartment in the United States is over $1,200 nationwide. The effect of inflation is even more apparent in majorly populated cities:
  • Miami: $1,995
  • Seattle: $2,049
  • Boston: $2,150
  • Los Angeles: $2,362
  • New York City: $2,650
In 1930, a gallon of milk cost $0.26. Today, a gallon of milk easily costs over $3.00 at any grocery store or supermarket. In 90 years, the price for a gallon of milk has increased over 1150% (nearly 12x more expensive).
If you had $3.00 in 1930, it would have bought you nearly 12 gallons of milk. Today, that same $3.00 will barely buy you one gallon of milk.
And if you’re counting on your job income increasing to cover the rising costs of inflation, don’t. According to historical wage data, American’s paychecks are much larger than they were 40 years ago, but our purchasing power has barely moved.
The truth is, the purchasing power of your dollar is decreasing every year. And there’s nothing you, I, or anyone can do to stop that. So, if saving isn’t the answer, how do you grow your money then? How do you overcome inflation?
  • Investing. And here’s why:

Saving Is Not Enough

Remember that savings account we talked about? While it’s a great place to hold your emergency fund, it’s a terrible place to grow your wealth. The money held in your savings/checking account at your bank CANNOT outpace inflation. Simply put, it is just earning too small a rate of return.
On average, the inflation rate of the U.S. dollar is roughly 2-3% per year. Meanwhile, the average interest rate on savings accounts is under 0.10% APY, with some of the largest banks paying as low as 0.01% APY (annual percentage yield). I’m looking at you Chase, Bank of America, and Wells Fargo!
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This means that every $100 you have sitting in the bank is decreasing in value by $2 to $3 every year. Each and every year. At the same time, your bank is only earning you about $0.01 to $0.10 (yes, that’s 1 to 10 cents) of yearly interest for every $100 you have sitting there.

How Does This Affect Your Money?

To truly put this in perspective, let’s say you have $10,000 sitting in your savings or checking account. Let’s be generous and assume you’re earning 0.10% APY interest at your bank with the historical average 2% rate of yearly inflation.
  • $10,000 Today - 2% annual inflation = $9,800 in buying power one year later.
While you’ll still have your original $10,000 sitting in your bank, it will only be able to purchase $9,800 worth of goods and services just one year later.
But wait, didn’t you earn that 0.10% APY interest? Didn’t you actually make money? Afterall…
  • $10,000 Today + 0.10% APY interest = $10,010 after one year.
Simply put, you started with $10,000 and made $10 in interest. But don’t forget, due to inflation, you lost $200 worth of purchasing power.
  • $10,000 + $10 - $200 = $9,810

The Danger of Leaving Your Money In the Bank

In the end, you lost $190 worth of buying power on the $10,000 you had sitting in the bank. And that’s just after one year! Imagine how much buying power you’ll lose year after year, and decade after decade. Not to mention, the more money you have sitting in your bank account, the more buying power you will lose:
  • i.e., with $100,000 in savings (earning 0.10% APY interest), you would lose $1900 worth of buying power each year.
So when it comes down to it, savers are “losers” at the end of the day. And I don’t mean that in a condescending way, I mean that in a literal way. You are literally guaranteed to lose money every year your money is sitting in a bank.
It's not because you're going to spend it, It’s not because the bank is going to steal it. Banks are FDIC insured. It all comes down to inflation.
Inflation isn’t noticeable overnight. You can think of inflation like termites, you know those ugly-looking bugs that everyone hates. And what I mean by that is, the effects of inflation day by day, you don't really see it. But over time, it takes a huge toll on your savings, just like termites.
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Day by day, you may not notice the structure of your house being affected by termites. But, after years and years of having termites, you're going to know you had termites when the whole house is falling apart, because of the termites eating through the wood. And that is exactly what happens with inflation.
So, any way you look at it, things get 2% more expensive every year, or you can buy 2% less every year with the money that you currently have. That is inflation.
You may not notice the effects of inflation today, or even in a year. But as the years and decades go by, that is when you really feel its effect. But by then, it’s too late.
So the next time your Aunt Sally or your friend Mike argues that the safest place to keep your money is in the bank… remember the negative power of inflation.
Again, there’s nothing wrong with keeping your emergency fund in a savings account at the bank. That’s where it should be. But anything beyond that, should be invested.
  • Investing is all about preserving your buying power.
So now you know that strictly saving, without investing, is a guaranteed way to lose your money. In the next article, we’ll be diving into why you need to invest and how you can actually outpace inflation through investing.