Why it’s Not Smart to Keep Your Money in the Bank

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Still sending your entire paycheck to a regular old bank account? Whether it’s Chase, Bank of America, or any other banks out there, this isn’t a great strategy. Based on current rates, you’re probably only earning around 0.03% a year! That’s not enough to keep up with inflation.



What Is Inflation?


Inflation is the increase in goods and services over time. If your money doesn’t keep up with the rate of inflation, which is roughly 3% per year, you’re actually losing money.


IRL example:


In 1999, a gallon of milk cost $1.30. Today, the same product costs $2.56. The price of milk has almost doubled over the course of 20 years, despite the product being pretty much exactly the same as it was back then.


The same phenomenon occurs with almost all other goods and services. Everything from a slice of pizza to the cost of a home goes up over time, even if the actual product doesn’t change. Right now, even high-yield savings accounts aren’t offering interest rates higher than 3%. That means that if all your money is kept in one, you are losing money over time.


Another IRL example:


Say you have $10,000 in a checking account. Ten years from now, that $10,000 will actually seem like it’s only $7,441 based on historical inflation rates. You’ve actually lost the purchasing power of about $2,500. Because everything costs more, you can buy a lot less. It’s almost like you’re paying for your money to sit there!


And no, your annual cost-of-living salary increase isn’t necessarily keeping up with inflation, either. In fact, the opposite is usually true. The increased cost of labor to businesses is in turn reflected by an increase in the cost of the goods they sell, thereby passing the higher labor costs back on to the consumer.



So, how does one protect themselves from inflation? Here are a few things we suggest to our clients:

  • Divide your paycheck. Send the money you need to pay bills every month to your low-interest checking account (where you had better have auto-pay set up). Send the rest of the money into an investment vehicle, even it’s just a short-term one like a money market account. If the money market account earns just 1%, this move alone increases your returns by 97% (remember, you’re only making about 0.03% in a regular checking account). Historically, the average annual rate of return for the stock market is 7%—well above the average inflation rate.
  • If you’re new to money management, seek the help of a financial professional. A pro can help you determine how much you need to keep in cash to fund your day-to-day life and provide you with short- and long-term strategies to help you achieve your goals. We recommend starting the conversation earlier rather than later—the every day you wait to implement a saving strategy is a day you lost out on potential growth.

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