Am I losing my money by saving it? With less than a percentage of return from savings accounts and CDs and more than 2% of inflation to go with, this is reality. Let’s do an analysis of this situation of losing money to inflation.
It has been ingrained and pounded into us as one of the best strategies to achieve financial freedom for decades, but saving alone, is not enough. Being Frugal and living within your means are buzz words many people gravitate to for endless guides, tips, and how-to articles. However, no one ever saved their way to financial independence with the absence of investing and it is easy to see exactly why
Likewise, current interest rates are seen even lower. A Bank of America Interest Checking and regular savings account is producing only a 0.01% return on saved cash. In other words, there is minimal advantage to stashing away your hard earned money in a typical savings account.
What about CD’s?
CD rates do not fair much better when looking for respectable results. According to BankRate.com, 6-month CD yields, 1-year CD yields and 5-year CD yields since 1984 have decreased similarly with savings account interest rates.
Money locked away in long-term CD ensures you are not going to spend that money in impulse. But, the bottom line is your money is not going to grow much.
Now look at the historical inflation rate from inflation calculator. Right now inflation rate is more than 2%. That means. If you keep $100 in Savings account or CD, next year the value of the investment will become $100 – inflation on $100 + interest on $100. Now since inflation is more than interest earned. Your investment value next year will be slightly less than $100. So, you’re losing your money to inflation!
Are There Better Ways To Save Money?
If saving is a major part of your financial plan, such as an emergency fund, it only makes sense to use banking accounts that give you the biggest bang for your buck. Now to get higher return you need to look beyond safe investment. As risk grows, return follows.
An index fund is my perpetual favorite. For the low fees and for being safest mutual fund that invests in stocks.
Lately, seeing results of my investment in Prosper peer-to-peer lending, I started recommending my readers about it. My 3 year cumulative return from prosper was a mind-boggling 23%. This year alone my investment grew at 7.8% rate. I highly recommend Prosper as an investment route. You can also try Lending Club.
Consider Saving Less and Investing More
Once your emergency fund is at a comfortable level, consider investing extra money that is sitting on the sidelines. There are a number of great investment vehicles to choose from:
- Roth IRA: Vanguard has multiple Roth IRA fund selections for experienced or new investors alike. For new investors with limited experience in financial markets, I suggest the Vanguard Star fund. The Star fund has a small account minimum and is greatly diversified.
- Rental Properties: While the initial start-up cost of purchasing a rental property is high, the long term payoff of a steady stream of passive income is more likely to lead to financial freedom than not.
- Peer-to-Peer Lending: Lending Club and Prosper are industry leaders in peer-to-peer lending. Returns on investment may vary; however, the average rate of return from a quality borrower is solid.
Use a more balanced approach. A combination of saving with investing will sow the seeds for financial freedom. For more investing options, check out Best places to invest money this year, 4 Ways To Invest $100 Or Less and where should I invest my money.
About the Author: This article was written by Chris at CentsToMe.com, a website with the mission to help others make sense of saving, investing, and finding a work-life balance. Follow CentsToMe.com on twitter at @CentsToMe and on Pinterest. For more articles like this and much more, visit CentsToMe.com
Lance @ Healthy Wealthy Income says
Yes, I am losing money, but the money I place in these accounts are not for money building. It’s emergency or quick access money and that is it. It makes what I expect. Everything else goes in to other vehicles you mentioned above.
Yes you got it right. We all keep not-a-very-large amount in savings accounts. And. that is mostly for liquidity.
But there are people who simply keep all the savings in to a CD or a savings account. This post is for them
Grayson @ Debt Roundup says
I keep some money in my savings for when I need it quickly. I don’t make any money there because of inflation, but it is my security. Other money is used for investing. I wish I could invest with P2P, but my state has blocked that practice.
Chris @ CentsToMe says
Thats to bad on the P2P investing. What state is that?
Good article. I don’t like the fact that my hard earned money is losing value to inflation in my bank accounts however you are absolutely right on. My preferred investment vehicle are rental properties but I have to save money for down payments after each one. It’s during that saving period where I’d like to stash it somewhere else I’m just hesitant to keep it somewhere that is not as liquid as I would like it to be.
Leaves me with good thoughts to ponder.
I think you’re talking about series of rental investment and paying off the mortgage with rent. I heard about that and in fact know someone who does that. We got our first home last year. So, we kept the down payment in a online savings account for last two years. It makes sense to keep such cash in checking accounts.