An article
about some of the pitfalls when trying to save for college and
retirement. Also some do's and don'ts about saving and what banks really
do with your deposits.
The Basics:
If there is
one idea that many people in america hear repeatedly through their lives,
its the concept that saving money is a
pretty good idea. From your mother to your banker, people preach to you about
working hard and saving your money for your retirement. In fact,
its described as the key part of the blueprint to success in
america. This mythical description of how one's life should be lived is
just that - a myth. America is not setup for the individual to save money
- America is setup for corporations to make money and for individuals to be
beholden to them through debt until they die (and possibly beyond the
grave). Ok, this seems pretty harsh but let's address some of the myths
about saving money and you can make your own judgements.
Myth #1 -
"Save your money so you can go to college, get a good education and get a
good job". On the surface this sounds good, and certainly having a
good job is worthwhile so saving for college seems pretty smart, right?
Well, if college is such an american ideal and the right thing to do, why is
college so expensive and getting more expensive every day. Today many
young people have to borrow several thousand dollars to go to college. If you
want to get a degree for the higher paying professions (think lawyer
or doctor) you probably have to borrow even more money, and
spend additional years in college at one of the more expensive
schools. When a young person graduates from college they are are often
saddled with debts that are in the tens of thousands (some over $100,000)
before they get their first job and paycheck. College is great, but don't
think saving for college is the guarantee for financial success. It could
lead to many years of financial uncertainty (and thats IF you can get a job in
this tough and competitive environment).
Myth #2 -
"Open a savings account at my bank and save your money for the
future". Sure the bank will hold your money for you in a savings
account and pay you interest on the money, but the rate of return at the
bank is probably the worst rate of return of any place you can put your money
(besides under your mattress). Savings accounts at most banks today give
you an interest rate between 1% and 2%, while inflation historically has been
closer to 3% to 5% which means that your savings is not even keeping up with
inflation. In other words, the money you put into your savings account
today will be worth LESS when you take it out. To add insult to injury,
the banks are collecting all of your money and using it to make a rate of
return anywhere from 5% to 30% while they give you your
paltry 1%. They invest your capital and make the money you should be
making while your savings are losing value against inflation.
Myth #3 -
"Get a credit card so you can save 1% - 2% or save frequent flyer
miles". These little offers that credit card corporations give you
may sound like great savings ideas, but the 1 or 2 percent you save on your
monthly purchases is dwarfed by the 10% to 30% you pay on interest on those
purchases. Every time you purchase something on the credit card you are
not saving 1% you are actually losing between 6% and 28% (depending on the
interest rate on your card). Even if you pay off your balance in full at
the end of each month, you still end up paying annual fees and other
transaction fees that more than offset the minimal savings offered by the
credit card company. Besides, if you can afford to pay off your card in
full at the end of every month - use cash and avoid any fees!
Myth #4 - “Get a
CD and don’t touch it. Your money will grow.” Certificates of
Deposit (CDs) are accounts offered by banks and credit unions where you place
the money in an account for a period of time (3 months, 6 months, 5 years or
longer) and you get a rate of return generally higher than a bank (but only a
few percentage points higher). The longer the term, the higher rate of
return you get but in today’s economy it is nearly impossible to get a CD that
is paying even 3% (again not enough to even cover inflation). What makes this
even worse than a bank savings account is that if you withdraw your money early
you will be hit with a substantial early withdrawal penalty (in some cases 6
months worth of interest earnings). Basically with a CD you are locked into a
low-yielding account that will leave you with less spending power when you
finally cash out than when you got in. Again, just like with the savings
account, the institution giving you the CD will have made much more money
reinvesting your dollars than you ever did.
Myth #5 - “Buy a
house, it’s your best investment you’ll ever make.” There was a time when
buying a house was a great way to build your net worth. The house
appreciated 10% or more per year and the equity you built in your home was like
having a high yielding savings account that didn’t cost a penny. Well I think
we know that the days of 10% or more house appreciation are over and many
people in America have seen their investment DROP in value substantially. The
best savings investment vehicle has turned into the biggest money pit for
millions of homeowners in this country. If you were one of the unfortunate ones
who spent their home equity instead of leaving it in the home you really
understand why using your house as a savings vehicle is probably the cruelest
joke of all. The debt incurred may last a lifetime if some drastic steps are
not taken.
Myth #6 - Put
your money under the mattress. Nobody will get it there." Sure, until
you’re robbed! What about when you’re house burns down in the LA wildfire, or
Hurricane Katrina washes all your money down the bayou. Saving money in your
own house (even in a safe) is frought with disaster and when the money
is lost or stolen you have no place to go to get your money back.
It should be
obvious from these examples that many of the traditional ways of saving
money can really be a money losing trap. Corporations and the government
don’t want you to save money, they want you to give them your money so they can
make profits without risking their own capital. If you really want
to make money forget about saving and start thinking about earning,
or putting your money to work for you. The next article in this series will
explore some of the money earning options out there, and as always we will tell
you what you may not know and what you need to know.
What you may not know:
- According
to the Institute for College Access and Success in 2008 over 200,000
students owed more than $40,000 in student loans. In 1996 there were
only around 20,000.
- Although
they may not pay you much interest, your money is very safe in the
bank. In the 75 year existence of the FDIC (the institution that
insurs your money) no customer has ever lost a penny of insured deposits.
What you need to know:
- Banks
pay the lowest interest rate of any institution you can put your money
in. The interest rate on a savings account is between 1% and 2.5%
while inflation is historically around 3%. At that rate you will
lose money every year.
- Most
CDs have strict and substantial penalties if you withdraw your money early
(sometimes up to 6 months of your interest earned).
- In 2010
the cost to attend an average four-year university ranges from $40,000 to
$120,000 for the full 4 years.
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