It’s a scary world out there, and we live in uncertain times. Threats of trade wars, talk of an impending recession, worries over national security and the constant stream of news of the stock market dominate our world today and it seems like any day now everything is going to fall apart. Many young professionals also remember the financial crash of 2008; many of us saw our parent get laid off, our grandparents wonder if they could retire, and our slightly older friends fail to land a job after college and move back in with their struggling parents. 

With this fear in mind, many of us are very cautious with our money, and that’s not necessarily a bad thing. A healthy fear will lead us to more carefully consider what we do with our money, and hopefully we’ll keep enough set aside in an emergency fund so we can weather any future storms. 

However, I worry that a lot of us are a little too cautious with our investments and savings and we’re in a bit of danger of missing out on the benefits of sound investments in the stock market. Let’s explore how just keeping money in a savings account could make you poor. 

Inflation

One of the biggest reasons I say you’re going to lose money by just keeping it in a savings account is inflation. What is inflation? Inflation means that the overall economy is growing; more goods are being produced and more services being consumed. Along with that increase in demand comes an increase in prices. In today’s world, we are still looking at 1-2% annual inflation. This means that what used to cost you $1 now costs you $1.02. Just like that. Unless your savings account is paying more interest than the current rate of inflation, you are losing money. That is why keeping money in a savings account can lose you money. 

Learning to be ok with risk

Ok, so we can’t keep our money under a mattress, and we can’t keep it in a savings account, so we’re forced to look elsewhere and invest our money in the stock market. Although the market has its ups, and it’s downs (sometimes big swings), on average, from 1928 to 2016, the S&P 500 (a good measure of the market as a whole) has returned a 10% gain. Wow. So even in a terrible down year like 2008, when the market went down like 30%, it quickly came right back up. Assuming you didn’t panic and pull your money out, you earned back what you lost, and continued earning money. Risk is a part of life and assuming you can manage it, risk will be where you get your gains. As the old saying goes, ‘nothing risked, nothing gained.’

Investing in the stock market can be intimidating, so start simple. Actually, I believe that investing simply is probably the best idea. I truly believe that index funds are the way to go. It’s very difficult, even for expert stock pickers, to pick winning stocks, so why try? An index fund essentially buys most of the biggest stocks trading on the stock market today, fairly equally. An index fund allows you to spread your money out over a large number (think 200-500) of different stocks. Naturally, some will go up, and some will go down, but historically more have gone up vs. going down. This strategy is much easier, and a cheaper way to invest! $VTI (Vanguard Total Stock Market Index) is one of my favorites. 

Getting the most out of your savings account

Now, if we’re taking on some risk, we also must learn to manage that risk. It would not be wise to put all of your money in the stock market, as that’s too much risk. You definitely should keep a portion of your money in a savings account.  In my setup today, I’ve got an emergency fund with about 6 months of expenses set aside. I’ve also got a regular savings account that I keep some money in. This money isn’t earning a lot of interest, but I feel confident knowing that my money will be safe in there and if the market had a bad few months, I still had money that I could rely on. There are also more and more banks that pay better interest (i.e. 1% vs 0.1%). A couple of online banks that I like are: American Express, Capital One or Ally Bank. If you’re going keep your money in a savings account, make sure it pays the most interest that it can!

Being successful in life means taking risks, so learn to take responsible risk with you money and don’t just keep it all in a savings account!