Problems Of Saving Money – There are two types of money problems. One is when you don’t have enough money, and the second is when you have too much money, and you have to manage it. Which one do you prefer? Most of you would probably prefer the second one. At the end of the day, thinking about how to invest your money is far better than planning how not to die out of starvation.
But the reason why so many of us are in such a dark financial situation is because of the lack of financial literacy. We somehow came to the conclusion that we naturally understand how to manage our money when the opposite is true. According to a study, the lack of financial literacy cost Americans $415 billion in 2020.
What Are The Problems Of Saving Money?
For some reason, people lean to believe that financial success is more of luck than hard work, but by looking at the lottery winners, we can confidently say that it’s not about not having money because the overwhelming majority of lottery winners go back to where they started after a year of winning the lottery since they mismanage their money and end up wasting it in less than 12 months.
That’s not surprising because only 30 percent of Americans have a long-term financial plan. And having a financial plan is very different from following that plan, so the percentage of people who take their financial lives seriously are a small minority. But then we complain how about how greedy capitalists like Jeff Bezos have corrupted the system.
Well, of course, the system is far from perfect, but if you want to do better financially, you have to accept your reality and succeed within it. The most popular financial advice you probably heard of is to SAVE at least 20 percent of your income, have an emergency fund. That’s solid advice considering that 40 percent of Americans have less than 300 dollars in savings, but that’s not enough!
What if I told you that saving money is a bad idea? In fact, if you would have spent all of your savings last year, you would be doing far better financially than you are now? I know that this is against everything you have been taught about money, but in this article, you will find out why saving money, at least this year, is a bad idea.
One of the most common ways throughout history people has made money is through saving account. You could keep your money in a bank, and in return, the bank would pay you interest. In fact, that’s how banks work in the first place. They take your money and lend it to someone else in the form of mortgages, car loans, and so on.
Back in the 1970s, for example, you could earn anything from 7 to 9 percent on your savings account. To be honest, that’s a pretty decent return considering that savings accounts are one of the safest forms of investments. But that has changed over time. Keeping your money in a bank today will earn almost nothing?
What? Nothing! Well, not exactly nothing but something close to that. The largest US banks pay anything from 0.01 to 0.05 percent. Just to give you a sense of how little is that. If you keep your hard-earned thousand dollars in a bank, at the end of the year, you will receive an extra 50 cents. Yes, you won’t even earn a dollar!
But why!? Because banks no longer rely on the depositors to function. Banks don’t need your money to be able to lend to others. They can simply borrow from the Fed at a very low rate like 0.5 percent and lend it to everyone else at a higher percentage, like 2 percent. So it doesn’t make sense to pay you a higher percentage if you deposit your money in a savings account.
Banks have shifted from being an investment tool to a place just to park your money. So any money you save slowly becomes less valuable over time due to inflation, especially since 2020. If you haven’t spent your savings last year on any asset that appreciates in value, your savings are worth significantly less than they did last year. Let me give you a simple example. In the last quarter of 2019, right before the pandemic, the median home price was 318K dollars.
Fast forward to the second quarter of 2021. The median house price jumped to 375K dollars. That’s around a 20 percent increase. In fact, house prices have increased by around 25 percent on average, which means that you would be far better off spending all of your savings on any property last year than keeping it in the bank.
That was not unique to real estate. Asset prices have grown across all categories. Some even doubled in less than 12 months. That’s why most rich people bought as many houses as possible, invested in the most stable companies, and even spent fortunes on cryptocurrencies just to avoid cash because keeping cash since 2020 was a bad idea.
If you have even invested that money in yourself in any way possible, that would be a better idea than just keeping it in a bank where interest rates are at almost zero percent. We don’t really know how long this astronomical inflation is going to continue. It definitely has slowed down, but judging by the Fed’s contradicting statements, it’s unclear how long it will continue. It might last another year.
The only savings account that makes sense to keep your money in is crypto. Wait for a second! Can you lend your crypto and earn interest? Yes, you can! But crypto was created to decentralize the financial system so that we can avoid the banks. Well, that’s a story for another time. There are crypto banks like Gemini to whim you can lend your bitcoins and earn up to 8 percent interest.
The only problem is that your interest is paid based on the price of the crypto. And judging by how volatile crypto is, at least today, your 8 percent can either be a lot or very little depending on the mood of Bitcoin. What you have to keep in mind is not to lose your principle when trying to make money on your savings.
What’s the point of getting a 20 percent rate of return when the price of that crypto could go to zero? It actually happened. That also applies to peer-to-peer lending. Your sibling might promise you a higher interest rate, but good luck even getting your principal back. As a wise man once said: if you lend money to a friend, you will either lose the money or gain an enemy. Despite the importance of saving money, it isn’t always the right strategy for financial independence. How many people do you know became financially independent, flipping coupons and saving every penny possible?
Don’t get me wrong. I am a passionate supporter of the FIRE movement, and I do save the vast majority of my income, but there is only so much you can save. There is a limit that you can’t cross. As a human, you need to spend some money to cover your basic necessities, so focus on increasing your income rather than just saving. In fact, sometimes saving money can do more harm than good. Buying low-quality food, for example, will damage your health over time and reduce your life expectancy. So all that money you save but won’t be able to spend throughout your lifetime is money wasted.
Sometimes when we are so desperately trying to chase money that we forget the very purpose of money. Money is not the goal. Working hard just to have more money is not going to make you live forever, and it’s not a fulfilling job. Money is a tool to achieve more meaningful goals, such as a better quality of life for your and your family.
To have the financial freedom to do what inspires you, and the list goes on and on. Every hour you spend earning money is an hour you could have spent doing other things that make you happier. Of course, if what you’re doing is both earning you money and making you happy, then you are a lucky person, but that’s not usually the case for most people. Does that mean you should stop saving money? Not really! Whether the inflation rate is 3 or 4 percent. You always need to have an emergency fund. Something always goes wrong, no matter how perfectly you plan.
Of course, you can use your credit card, but paying a 25 percent interest on your credit card is the first financial mistake you should avoid at all costs. If your emergency fund is enough to keep you alive for a year at least should something go wrong, you should be fine.
The rest, if you are young, invest it aggressively to rip the rewards of compound interest. I know that 20 or 30 years looks like a really long time, but it’s going to happen a lot sooner than you imagine. But where should you invest your money? Investing today is easier than ever. You have the real estate, the bond market, crypto, or the stock market. But before you start investing in the stock market, you have to understand the basics of the stock market. You have to learn how to read financial statements, analyze companies, and read between the lines.