My Passive Income Journal

Why Long-Term Savings in the Bank are Not Wise

How Inflation Eats Away at Savings and Why Savings in the Bank are Not Wise

Saving money is a fundamental practice of financial management, however I believe that savings in the bank are not wise. Thus, when it comes to long-term savings in the bank, it’s essential to consider the effect of inflation.

Inflation is a natural economic phenomenon where the general price level of goods and services increases over time. The effect of inflation on savings can be devastating, particularly in the long run.

In this article, we’ll discuss how inflation eats away at savings and why long-term savings in the bank may not be the wisest financial decision. I personally only hold the amount I think I will need to cover an emergency in the bank. Savings in the bank are not wise in my circumstance (your mileage may differ of course).

What is Inflation?

Inflation is a sustained increase in the general price level of goods and services in an economy over time.

In simpler terms, inflation means that your money loses its purchasing power over time.

The inflation rate is typically measured using the Consumer Price Index (CPI), which tracks the average price of a basket of goods and services consumed by households.

The Effect of Inflation on Savings

Inflation can have a significant impact on your savings, particularly in the long run. Suppose you have $10,000 in savings and inflation is 2% per year. In that case, the purchasing power of your savings will decrease by 2% every year. In other words, after one year, your $10,000 will only be able to buy goods and services that cost $9,800 one year earlier.

The effect of inflation on savings can be even more severe in the long run. Suppose you plan to save for 30 years and your average annual return is 5%. If inflation is 2% per year, your real return (i.e., return adjusted for inflation) will be only 3%. Over 30 years, the purchasing power of your savings will be reduced by 45%. In other words, the goods and services you could purchase with $10,000 today will cost you $15,000 in 30 years.

My Passive Income Journal

Why Long-Term Savings in the Bank are Not Wise

Many people choose to save their money in the bank, assuming that it’s the safest place to keep their money. However, long-term savings in the bank may not be the wisest financial decision. There are a few reasons why:

  1. Low Interest Rates: Banks offer very low-interest rates on savings accounts, typically around 0.01%-0.05%. This means that the real return on your savings is negative after accounting for inflation.
  2. Taxes: Interest earned on savings accounts is typically taxable. This means that you’ll have to pay taxes on the interest earned, further reducing your real return.
  3. Fees: Some banks charge fees for maintaining savings accounts. These fees can eat into your savings and reduce your real return.
  4. Opportunity Cost: By keeping your money in a savings account, you’re missing out on other investment opportunities that could potentially offer higher returns. For example, investing in the stock market could potentially offer returns of 7%-10% per year over the long run.

Maybe Do This Instead

Instead of keeping your long-term savings in the bank, consider investing in other assets that could potentially offer higher returns. Here are a few options:

  1. Stocks: Investing in stocks can be a great way to grow your savings over the long run. Historically, the stock market has offered returns of 7%-10% per year, which is much higher than the inflation rate.
  2. Bonds: Bonds can be another good investment option for long-term savings. While the returns may be lower than stocks, they offer a more stable and predictable return.
  3. Real Estate: Real estate can be a good investment option for those looking for long-term returns. While the initial investment may be high, real estate can provide a steady stream of rental income and appreciation over time.
  1. Retirement Accounts: Retirement accounts such as 401(k)s and IRAs offer tax benefits and can help grow your savings over the long run. These accounts typically offer a variety of investment options, including stocks, bonds, and mutual funds.
  2. Alternative Investments: Alternative investments such as private equity, hedge funds, and real estate investment trusts (REITs) can provide high returns but come with higher risks. It’s essential to research and understand these investment options before investing.

TL:DR Summary

Inflation is a natural economic phenomenon that can have a significant impact on your savings over time.

Long-term savings in the bank may not be the wisest financial decision due to low-interest rates, taxes, fees, and missed investment opportunities.

Instead, consider investing in assets such as stocks, bonds, real estate, retirement accounts, and alternative investments that offer higher returns over the long run.

It’s best to research and understand the risks and potential returns of each investment option before investing. By doing so, you can grow your savings and beat inflation over the long run. Even if you are late to investing, it’s worth considering that savings in the bank are not wise always.

Cheers,

Hugh Walker