Tuesday, November 23, 2010

Is It Worth Saving Your Money?

Firstly, when we talk about saving money, it's important to accurately define the term. Saving can mean two things. It can mean having a cash cushion or an emergency fund in the event of the unexpected. Many financial blogs call for saving up to six months or more worth of your income in case of unemployment, sickness, or anything else. I'm not sure six months is attainable, or even necessarily desirable for the average person.

Think about it. If you make $36,000 a year, that's about $3000 a month before taxes. Six months of savings would equal $18,000. While it would no doubt would be nice to have $18k just sitting around, providing some peace of mind, that amount could be put to better use. In fact, merely putting away such a large amount and letting it sit in a savings account may actually be counter-productive.

For the purpose of this article, I'm using the term "saving" as a means to invest money. You should always have an emergency fund set up. But is saving your money a viable investment choice as a means to increase your portfolio?

More than likely you, like everyone else, will have to invest in the common CDs and money markets you see advertised at banks local and nationwide. For the latest rates on one year CDs, let's check out Bankrate.com's latest rankings.

As of today, the highest rate is 1.32% through a bank called Ally, with no minimum deposit. If you were to invest $1000 at that rate, you would earn $13.20 in one year. That's hardly enough to buy a ticket to an evening movie, much less in IMAX or 3-D. If you for any reason have to withdraw your money early from the CD, you would no doubt incur a fee that would wipe out any earnings you make on that $1000.

However, that $13.20 is really just an illusion when you factor in inflation. Here's why. Thus far in 2010, inflation has actually been historically low. It began at 2.63% in January and dipped as low as 1.05% in June. Average it out and it sits around 2.00% This means that really you're losing at the least, .68% of that $1000 by sticking it in a CD. So just by opening up a supposed "safe" investment like a CD or money market, you lose around $6.80. The most you could hope to keep in one year is $993.20, assuming there aren't also fees associated with opening up your new account, and based on an average of 2.00% inflation for the year. Inflation tends to average higher--like in-between 2-3%--so think of the loss of $6.80 as a minimum.

Well, obviously if you're losing money in an investment, it's not worth it, is it? Even if you count "peace of mind" as the highest virtue, and you just like your money sitting safe in a CD or savings account, ultimately you're going backward.

But how can this be? Aren't CDs and savings accounts the "safest" ways to invest your money? That's what we were always told since the time we were kids. ING Direct, the popular online bank and brokerage (which I use) is famous for its "Save your money" marketing campaign. Well, I'm sure that's worked great for ING, but has it worked for its customers? Currently, ING offers a 1.10% APY on its Orange savings account. That's pitifully low, far lower than 1.32% offered by Ally, and that one isn't good either.

Unfortunately, the days of "a penny saved is a penny earned" are long gone. The Fed, acting in conjunction with other national banks, has gone out of its way to turf out the conscious, safe investor. They have done this to spur borrowing both in home mortgages and credit cards. The goal here, of course, is to get you into as much debt as possible. Now saving your money is actually a losing strategy, and you are pretty much forced into investing in Wall Street or other, riskier methods. This amounts to a redistribution scheme of staggering scale. Your money is practically being vacuumed out of your pocket and handed to the big banks. Meanwhile, the government stands by and does nothing, as usual.

Well, there's no point in getting cynical. The more you keep yourself aware of what's going on, the better equipped you will be to act wisely when it comes to financial matters. When it comes to saving money, it's okay to invest in a CD. Just understand that in all likelihood, you are gradually losing money by doing so. However, on occasion some banks offer one time rates for first-time customers. You might even be able to lock in a rate that will keep you above the inflation line. Generally these rates come from local banks, so be sure to check your paper or local listings for any deals.

So, is it worth saving your money? No. At least, not for the purpose of straight investment. It's good to have some liquid reserves stashed away for use at a moment's notice, but just saving is clearly not the way to get ahead financially.

I would even go a step further and say this: CDs amount to a service you pay for to provide you the comforting illusion that your money is safe. They are cleverly designed ploys that do little more than keep the value of your money static (and even that they don't do well).

Here's some key highlights to remember about saving:
  • Saving might give you peace of mind, but it ultimately makes you lose money.
  • Inflation generally eats up whatever "gains" you make through interest.
  • The big banks want you in debt and have ramped up borrowing through low interest rates.
  • Check your local banks for deals. You just might find a diamond in the rough.

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