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- S.A. FI
- September 7, 2022
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The common rule of thumb in personal finance is to NEVER put your investments in the bank’s savings account unless you plan on using the money soon. The savings account is traditionally a place for capital preservation, meaning to place a higher priority protecting the amount that is in the account and less on making money from it. Due to the supposed safety of these accounts, the overall returns are lower than other “riskier” investments, such as stocks, real estate, cryptocurrency, etc.
It’s also commonly thought of as a fatal investing mistake to leave money in your bank account as it doesn’t keep up with inflation and devalues (lowers the value of) the money in the account.
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This is because when you have $100 in the bank with a 1% interest rate, then after one year the amount will be $101. However, with historical inflation at 2%-3%, if an item you are saving for was $100 in one year, then the product now costs $102-$103 a year later. You now must pay extra out of pocket for this same product.
In 2022, inflation has consistently been up between 8%-9%, so the product now costs $108-$109, meaning you will pay even more out of pocket for the product.
For a $100 item, paying out a few extra dollars may not seem like a big issue. However, what if you are saving for a higher priced item, such as $10,000. The product at 2%-3% inflation is now will cost $10,200-$10,300, but your bank only returned $10,100. In just this year (2022), inflation has been consistently around 8%-9%. Now, you need to come up with an extra $700-$800 for the same item. This has a much larger impact on your finances.
The year 2022 is a year where you should never say never to any type of investment. Since May 2022 through September 2022, my bank’s savings account interest rate slowly crept up from 0.50% to 2%. This is largely due to the Federal Reserve raising their rates multiple times this year. This shows that inflation isn’t all negative.
Also, this year the stock market went from a historical 52-week high to being down in bear market territory with an over 20% decline from this 52-week high in only 5 months from January to June.
If I had $1M invested in the stock market at the 52-week high, as of this writing in September 2022 that $1M will be worth ~$800k, losing ~$200k.
If this same amount was in my savings account, then at the interest rate of 0.50%, the savings account would be valued at $1,005,000, which is still $205k more than what the stock market is returning.
At the 2% interest rate, if this rate stayed constant, then the account would be worth $1,020,000, which is $220k more than the stock market.
Of course, I am only comparing stock market investing and leaving your money in a bank savings account. I have other “alternative” investments that returned double digits this year as they are inflation and recession resistant investments. It will be wise to have these investments in your portfolio for times like these.
In short, you never say never to any type of investment. There is a time and place for all investment, but because we don’t have a crystal ball to know when an investment is going to be better than another, you should diversify your investments across multiple asset classes.
While it is typically not advisable to time the market, which means to try and buy and sell your investments at specific times to take advantage of the highs and lows of the investment, by understanding where your investments are at in a particular market cycle, you can know where you can potentially focus your investments at different periods of time. I don’t consider this timing the market but instead taking advantage of market cycles.
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