Say what? Don’t put money into savings?! But we’ve been taught from the beginning of time that saving money is a good thing. Yes, in fact it is! However, a savings account itself might not be the best place to park ALL of your savings. The average interest rate on a US bank account is .09% APY. That is less than inflation (2.9% as of July 2018), so the typical savings account doesn’t even outpace how quickly your dollar loses value. This is a big deal!
To understand how this works, you need to understand inflation. Inflation means that a currency like the US dollar loses value over time. The US dollar has been inflating (losing value) since the 1940s. It’s simple really. A dollar in 1940 was able to buy a four-course meal, but a dollar today can barely get you a pack of gum. If you were to put $100,000 into a savings account tomorrow at an interest rate of .094% APY (the US average), then you would have $100,904.03 after ten years. Sounds good, right? Not so fast! Inflation has caused the dollar to lose so much value that the $100,904.03 you have in ten years can actually buy less goods and services than the $100,000 you put into your account ten years ago. What a sham! Back in the day, banks realized this and they kept their interest rates higher than inflation so that if you put your money into a savings account today and generated interest, the money you would have in ten years would be able to buy more goods and services than it can today. That’s what we call a good investment. Sadly, those days are long gone and it will be nearly impossible to find a bank that offers an interest rate that beats inflation. This is why it’s your responsibility as a smart saver to look for places to park your money that will actually gain value over time, and not lose it like a savings account today.
A 401(k) is a type of investment you may have heard of or may even have through your employer. In short, it is a retirement savings plan sponsored by an employer. It allows an employee to set aside money from each paycheck (before taxes are taken out) into an investment account. Taxes aren’t paid on this money until the money is drawn out of the account, usually at retirement. Oftentimes, an employer will match a certain amount of the money contributed by the employee into this account. This account is usually managed by an administrator who decides what underlying securities (stocks, exchange traded funds, mutual funds) to invest the money in. Generally, these accounts generate interest that outpaces inflation, and certainly can outpace the interest offered by a savings account. The average annual return on investment from a 401(k) is 4 to 8%.
Peer-to-peer lending allows investors such as yourself to fund all or parts of loans to consumers online. You can get started with as little as $25 in peer-to-peer lending, and are able to fund loans with a variety of interest rates depending on how much risk you want to take with your money. High interest rate loans have a high payout, but obviously represent more risk, while low interest rate loans have a low payout but are less risky. The average investor in peer-to-peer lending makes between 5 to 15% annual return on investment. You can fund a small part of many loans, so that in case a borrower defaults (doesn’t pay back) you only lose a small chunk of money. Platforms such as USA Express Loans are being developed to allow investors to fund payday loans and payday advances to borrowers who are in need of a short-term loan, but don’t want to get trapped in the cycle of debt from traditional high-interest rate lenders.
Stocks and Commodities
Some adventurous investors decide to dash out on their own and try their hand in the stock market. Buyer beware, the stock market is a risky place and even the most careful investors can and do lose money. However, investing in exchange traded funds (ETF) or mutual funds are a more stable option in the market, as you’re actually investing in a bunch of different stocks that have been carefully selected by a financial expert based on their stability and signals that indicate they will be successful in the future. For example, the average annual return of the S&P 500, one of the most popular exchange traded funds, is 7%. That still outpaces even the best savings accounts!
In the end, a savvy saver is a smart investor. You should always be looking for better ways to grow your hard-earned money. A bank paying .09% APY is not always the way! The bank is definitely going to make a better return on your hard-earned investment if you put the money into a savings account with them. In fact, most banks partake in stock and commodity trading in addition to lending your money for mortgages. Cutting them out of the mix can often be a smart choice. As with any decision related to your finances, we always recommend you reach out to a professional for guidance. Your money is precious, and the consequences of investing can be good and bad. Be smart, be diligent, and be a savvy saver!