Today I want to talk about the opportunity LOSS by keeping your money in savings versus investing in the stock market. I know a lot of people out there are scared of the stock market because they're confused by how it works. They worry about losing all their money, and they worry about fees and all these other things that come into play. So the folks with a fear of investing put their money in savings actually lose not only a ton of opportunity to increase their wealth, but they actually lose money in the process simply by doing nothing. And I'll explain a little bit in a second.
The Bureau of Labor Statistics has a calculator that illustrates the effect of inflation and the power of the dollar. I recently used it to assess the value of $1000 in the year 2000 versus the equivalent today. It shows us that the prices have went up 46.8% in that 18 year stretch, which means what used to cost $1000 in the year 2000 actually costs $1468 today in 2018.
Let's say you put $1000 in a traditional savings account in the year 2000 because you were scared to invest in the stock market. You would have missed out on average stock market gains of 8% per year, and received less than $20 from your savings account interest. Don't remember what the savings rate is in savings accounts but it's literally pennies. So I'll go ahead and say you walked away with $1020 just to round up.
Now let's say you were saving for a new TV with that original $1000. You saved it in the year 2000 and were waiting for the perfect opportunity. If you went to the bank in 2018, withdrew your $1000 and went to the store expecting the TV to still cost $1000, what you would find is the price has actually risen $1468. All of this due to inflation. So your money actually lost purchasing power over the last 18 years. In the time you earned a paltry $20 in interest, the price of your TV rose $468. That is a net loss of $448.
So the bottom line here, just understand if you're scared of the stock market, your best play is to actually learn about the stock market or learn about investing in general. Putting your money in a tin can out in the backyard or in the bank, and hoping that you'll be able to save enough for your future plans is like losing a race against time. You're working against inflation and you're working against currency value changes.
Another topic you'll hear related to inflation is the concept of jobs and wage growth. In America, with inflation being the way it is, if you're not making 3% more every year in salary, freelance work, or your business, then you are actually losing money. So if you made $50,000 last year, and you are making $50,000 this year, and you're going to make $50,000 next year, then you are actually going to lose purchasing power, somewhere in the neighborhood of 2.5-3% per year. You will make “less money” by simply making the same amount of money. Put that together over a three year stretch from 2017 to 2019, you could be missing out on $4600 on $50k salary. It just disappears in the sky because everything you purchase costs more now.
So bottom line, now is not the time to be nervous about investing. Invest your energy into learning about the stock market and investing options, at least enough to avoid losing money to inflation. You can still have a savings account for emergencies, but don't leave all your money in there to die.