Savings Account = Loosing Account
Equivalent to burning your money
Banks gave this name (savings account) for a reason. They make us feel like we are saving money for the rainy day and give us 0.5% interest. Considering the inflation which varies from 2-3%, it should be labeled as a ‘losing’ account. There are other tools that we can use to make money grow but liquidate it if needed but banks don’t tell us about it.
There are so many Nuances to financial game that one should understand. An educated investor can not only figure out how to pay off their mortgage in half the time keeping the same lifestyle but also use that saved money from interest to invest and grow it.
Savings Account Interest Rate
In the last few years, the interest rate on savings accounts is almost zero. There were times when one could expect to earn around two percent on the money in savings account. But it’s no longer the case. To understand the reasoning behind this, one needs to understand how the financial game is played by the banks.
Let’s take an example of home mortgage to explain what’s happening. Right now, one can get home mortgage at 4-5% interest. In order for banks to lend out money, banks have to have portion of that money in their vaults. In order for that to happen, they want people depositing their money into their savings account. In order to get that they offer some return on that deposit and have put it in the minds of people that they have to save it for the rainy day (instead of using other bank tools) in their savings account. The return on savings have to be substantially less in order for banks to make money. They offer less than 1% on your money in savings and use the same money to lend you a loan at 4%-5%. Do you see that to be fair for the customers or banks taking benefit of people having lower financial IQ?
Certificate of Deposits (CDs)
A certificate of deposit (CD) is a savings certificate with a fixed maturity date and fixed interest rate. Recently the return on CD’s has been less than 2%. This is another form of bank making you put your money aside for long term at a cheaper return and using the same money to lend you loans at a higher interest rate (4%-5%). This is similar to the concept explained above in the savings account. Most banks charge penalties — usually, several months of interest — if you withdraw your money before the term of the C.D. ends. CDs is also a ‘losing’ account due to inflation being higher than this return.
Inflation is the rate at which the general level of prices for goods and services is rising and, consequently, the purchasing power of currency is falling. According to inflationdata.com, the Average annual inflation rate is 3.22%. That doesn't sound too bad until we realize that at that rate prices will double every 20 years.
Something that cost $100 in 1914 would cost $2,375 now!
Putting this in perspective, your savings return <1%, CDs <2% and inflation at 3.22%. This means if you are putting your money in savings account or in CDs, it’s equivalent to burning your money. One needs to increase his financial IQ and invest it at the right place. One of the best rewarding returns are in Real Estate.