Find out how "savings" accounts actually destroy savings - and what you can do about it.
You’ll never be able to “save” a million dollars. Okay, we’re using a little bit of verbal trickery here involving those ironic quotes around the word “save.” But it’s true. Have you checked the interest rate paid on money sitting in a standard, plain-vanilla deposit account at your local bank?
A recent survey of the market showed that the highest rate paid was around 2%, while the lowest was, believe it or not, one tenth of 1%. With this kind of return, you will not be able to “save” a million dollars. For individuals looking for the path to financial independence, it’s more like the road to ruin. Here’s why.
The “money losing” account
Starting with, say, $1,000 and adding $200 per month for 30 years, you’ll wind up with a total of a little over $100,000. And only about $29,000 of that would be the interest you’ve earned. Factor in inflation (currently running about 2%), about 30% tax on the interest income, and the monthly fee the bank charges you just for keeping your money on deposit, and you’re actually losing money – plenty of it – on every dollar you’re allegedly “saving.”
This is no joke! The era of low interest rates makes it dead easy – maybe too easy – to borrow money to buy a house, say, or a car. But to save money? Not so easy. It’s what economists call a “disincentive.” To the rest of us, it’s just a raw deal.
For young people just starting out in the working world and building a nest egg for the first time, for professionals with established careers and perhaps a family, for older individuals nearing retirement, some with a considerable sum socked away…it’s the same problem. Where do you find decent yield in a low-yield world? How do you avoid the hucksters and con-artists with their siren songs of instant riches?
How to really save
It’s not easy. But with the right guidance, there are ways to invest your money, at a risk level that lets you sleep nights, with a decent return to boot. Various income funds are available that invest in a mixture of government and corporate bonds, and dividend-paying stocks. Some of these funds have been around for 20 years and more. And some have returned an average of 9% or more over those 20 years.
Even using an average 5% return, that same initial $1,000 with a $200 monthly investment for 30 years would grow to over $170,000, with nearly $100,000 of that coming from investment return. It beats a “savings” account hands-down. And if you use a Tax-Free Savings Account to invest, you’ll never pay a cent of tax on any of that income!
So this big secret is that while it’s okay to park your cash at the bank for a short period (say while you build up those savings from all the lattés you didn’t drink), it’s no road to financial success.