Why Saving Money is Not Enough
In this short video we will talk about the effect inflation has on savings and living expenses over time. I’m going to show you why it’s so important for your savings and IRA to be growing over time. Saving money is only one part of the equation.
I will also briefly talk about the time value of money concept (TVM). After this, I hope you will see why it is vitally important to invest money instead of just saving it.
According to Investopedia.com, here is the definition of time value of money.
“The idea that money available at the present time is worth more than the same amount in the future, due to its potential earning capacity. This core principle of finance holds that, provided money can earn interest, any amount of money is worth more the sooner it is received.”
It’s important to understand what this means for investors—or anyone who saves money for the long term. Money today is better than money tomorrow for one simple reason: it can earn interest as time passes. The basic premise we need to understand is that a dollar today is not the same as a dollar tomorrow.
This is because:
- Money in the hand today can earn interest. This grows the amount of principal over time.
- Paper money becomes less valuable with time. This is primarily due to inflation.
How Inflation Affects Investments and Savings
This is a very in-depth topic that I will cover only briefly here. I mention it to impress upon you the importance of investing with an eye toward earning a return on your money instead of just saving it. Here is the basic concept.
Inflation is the gradual increase of prices for goods and services. Put another way, it can be described as a decline in the purchasing power of money.
You may notice that things seem to cost more each year. Everything from gas to groceries keeps increasing in cost, by approximately 3–5 percent each year.
According to InflationData.com, the average inflation rate from 1989 to 2015 was 3–5 percent. This means that the cost of goods and services is increasing 3–5 percent each and every year. Now, it’s true the exact inflation rate can be argued, and a number of complex factors are involved. Many of these factors are beyond the scope of this video. This is why I mention a 3–5 percent range; it’s simply based on the data available.
What This Means for Us in the Real World
- It costs 3–5 percent more each year to buy the same items. This means $10,000 today will not purchase the same amount of goods and services five years from now.
- Money saved is worth 3–5 percent less each year. Or, put another way, it buys 3–5 percent fewer goods and services each year. Here is an example: If you save $100,000 today and it earns no interest, it will only be able to purchase $70,000 worth of goods and services ten years from now. That is assuming a steady 3 percent inflation rate. In short, you will have lost $30,000 simply due to inflation.
- Our purchasing power is going down or being eroded 3–5 percent every year. This is how savers become losers. You can save over a lifetime and still be barely able to make ends meet at retirement, simply because of the slow creep of inflation.
Due to the points just mentioned, it is imperative the money you save is invested and earns a rate of return, preferably above 5 percent per year. It’s easy to see that with it is very difficult if not impossible to simply save money and come out ahead. It takes putting that money to work earning more money that makes the difference.
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(This article is an excerpt from Joshua N. Andrews Book titled Paper Profits – How to Buy and Profit from Notes a Beginners Guide)
Request a free copy mailed to you by clicking here: http://notablefund.com/paper-profits-book-request