You’ll never be able to “save” a million dollars. Okay, we’re using a little bit of verbal trickery here involving those ironic quotes around the word “save.” But it’s true. Have you checked the interest rate paid on money sitting in a standard, plain-vanilla deposit account at your local bank?
A recent survey of the market showed that the highest rate paid was around 2%, while the lowest was, believe it or not, one tenth of 1%. With this kind of return, you will not be able to “save” a million dollars. For individuals looking for the path to financial independence, it’s more like the road to ruin. Here’s why.
The “money losing” account
Starting with, say, $1,000 and adding $200 per month for 30 years, you’ll wind up with a total of a little over $100,000. And only about $29,000 of that would be the interest you’ve earned. Factor in inflation (currently running about 2%), about 30% tax on the interest income, and the monthly fee the bank charges you just for keeping your money on deposit, and you’re actually losing money – plenty of it – on every dollar you’re allegedly “saving.”
This is no joke! The era of low interest rates makes it dead easy – maybe too easy – to borrow money to buy a house, say, or a car. But to save money? Not so easy. It’s what economists call a “disincentive.” To the rest of us, it’s just a raw deal.
For young people just starting out in the working world and building a nest egg for the first time, for professionals with established careers and perhaps a family, for older individuals nearing retirement, some with a considerable sum socked away…it’s the same problem. Where do you find decent yield in a low-yield world? How do you avoid the hucksters and con-artists with their siren songs of instant riches?
How to really save
It’s not easy. But with the right guidance, there are ways to invest your money, at a risk level that lets you sleep nights, with a decent return to boot. Various income funds are available that invest in a mixture of government and corporate bonds, and dividend-paying stocks. Some of these funds have been around for 20 years and more. And some have returned an average of 9% or more over those 20 years.
Even using an average 5% return, that same initial $1,000 with a $200 monthly investment for 30 years would grow to over $170,000, with nearly $100,000 of that coming from investment return. It beats a “savings” account hands-down. And if you use a Tax-Free Savings Account to invest, you’ll never pay a cent of tax on any of that income!
So this big secret is that while it’s okay to park your cash at the bank for a short period (say while you build up those savings from all the lattés you didn’t drink), it’s no road to financial success.
GoldenGirlFinance.com is a free personal finance and education site for women.
Nothing contained herein is intended to provide personalized financial, legal or tax advice. Before implementing any financial strategy, you should obtain information and advice from your financial, legal and/or tax advisers who are fully aware of your individual circumstances.