Should You Invest Your Money Or Put It In A Savings Account

 

There are a lot of opinions out there about living off your money. Here are the oft repeated concepts:

  1. invest it in stocks and/or bonds
  2. invest in CD’s
  3. keep it in your savings account
  4. invest it in businesses/real estate

The majority of the articles written online are paid for. The internet isn’t all Wikipedia. Matter of fact, Wikipedia isn’t the great unbiased source of information that many think it is either.., but it comes REALLY close. A website is started, it is somehow monetized and to keep it going eventually the owner/editor will hire writers. Websites that are notable are then purchased by larger companies and the information on those sites are then skewed to the interest of the companies running them.

The main point of this post is don’t let an article you read online put any fear in you. Put your money in whatever vehicle that gives you the most peace of mind at night and then adjust your lifestyle around that method. It seems to me that the majority of people do it the other way around. When it comes to your money and where you put it the facts are:

  1. The only information we have about finances is from history.
  2. Past performance is not an indicator of future returns.

This is such typical Wall Street talk. It’s a way to appeal to your logical mind by saying “hey look, what we say makes sense because we are basing it on facts”. It is also trying to appeal to your paranoid mind by saying “but these facts of the past have no bearing on the future whatsoever so just keep listening to us for what to do next”.

 

Thought vs. Instinct

My life philosophy is that  when there isn’t concrete facts/data that you can base a decision on then you should learn to trust your instinct. Thought and instinct are very different and often at odds with one another. You may have a thought of continuing to eat the giant cake slice because it’s in front of you but if you disconnect from your mind and delve into the instinct you will realize you are full and you would stop (depends on the cake for me).

Conversely, if your instinct tells you it’s time to be a little less frugal and it’s okay to get that cup of coffee but you are overly caught up in your thought process of remaining frugal then you will just create an imbalance that leads to frugal fatigue. 

 

Straight withdrawal of my funds if kept in a savings account.
Straight withdrawal of my funds if kept in a savings account vs invested.

 

Investing In Stocks/Bonds

Here is a little snippet from one of my many spreadsheets I keep. I have assets in total of let’s say $450,000. If I invested this money in the equity (stocks) and/or bond market I could reasonably expect to be able to withdraw $1,292 every month starting today and still seeing my principal (the $450k) go up in value. Briefly, the $450k invested will grow at let’s say 5% (inflation adjusted), I withdraw 3.5%. So the total will go up by 1.5% every year.

Keeping Your Money In A Savings Account

If I kept the entire $450,000 in a savings account, I could withdraw $25,000 every year (or $2,083/mo) for 17.72 years. Currently inflation is around 3% and savings account pay <<1%. So I would lose almost 3% of my $450k every year right? Absolutely not! That is not how money and inflation works. Inflation is based on certain aspects of economy but a more important inflation is personal inflation. There are many ways to personally hedge against inflation. I will post more about this later but you can do your own research in the meantime. I will also add here that savings accounts may eventually increase their rate of return. In the current economy they are abysmal. However, as lending rates go up we can expect higher savings account returns.

Putting Your Money In CD’s

Certificates of deposit aren’t that much better right now than a savings account. But just like savings accounts your money is insured up to a $250,000 limit. You can keep multiple CD’s up to the $250k level that way each chunk of your money is protected even if you have $1,000,000+ saved. CD’s rates also may eventually go up in value so that stocks/bonds won’t be only option for those seeking better returns. This is what I mean by remaining vigilant. If you have your money in a savings account and you see that over a few months/years CD’s develop better returns than you would naturally move your money into a CD if you feel comfortable doing so.

Real Estate/Businesses

Well, this is for the “big boys” right? Not at all. You can invest in real estate on so many levels now.

  • REITs
  • individual properties
  • private investment groups

As far as businesses, some like to think of these as creating passive income… obviously my definition of passive is very different from theirs. So even though owning your own business rarely becomes a fully passive endeavor there are great exceptions out there. I’ll give you a personal example. My very good friend’s family owns around 100 individual Jack In The Box restaurants. His dad has several physicians and dentists that have put up cash to buy a few stores with him. They are completely silent partners and his dad has done very well over the past 20 years even during the 90’s when JIB went through the E. Coli scare.

 

In Summary

  • if you dislike Wall Street or don’t trust it remember that you can still live off your savings kept in a savings account/CD
  • you can invest a portion of your money in real estate or a business to generate some semi-passive income
  • trust your instinct and don’t think you are ‘missing out’ on all the riches of the stock market… nothing wrong with being conservative

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