Over the last year, I developed a budget, started making more money than ever, and used credit cards to hack travel costs. I’m more motivated than ever to save money. Using this tactful budgeting and planning, I now have a surplus of savings! After years of bleeding red to student loan debt, it feels deeply satisfying to see the positive, green numbers.
Now that a little nugget of savings has developed, I’m realizing a different anxiety. There are various market actions that can negate your savings plans, and it’s important to protect against them. It seems like every place I look, there are risks for your nascent savings. Today, I wanted to spend some time explaining a few of the risks that await your new wealth.
Under the mattress?
Pros. The classic paranoid and/or privacy-minded decision is to just stick your extra savings under your bed. My late-grandmother seemed to be deeply concerned about her possible access to funds — likely influenced by the Great Depression — and she would constantly have funds hidden away around the house. I thought this was rather bizarre, but appreciated her desire for some amount of cash in case of emergencies. Most importantly, you are not exposed to stock market risks or banking fees.
Cons. Sticking your little nest egg in a little home safe or inside your mattress comes with some risks, too. Not only is your money literally exposed to the elements (i.e., fire, flood, or other natural disasters), but saving your money at home may be put your household at risk for burglars. Lastly, this decision makes you completely vulnerable to inflation (which is a serious long-term concern), you don’t appreciate from interest, or gain stock market exposure that averages about 7-10% per year.
In the bank account?
Pros. Take your paychecks, bonuses, and side income and leave it in your bank account. This could not be easier, and you don’t need to spend any more time deliberating and considering financial decisions. Although, if your money is deposited into checking account, I’d recommend transferring funds to a high-yield, online savings account. You don’t bear any of the stock market risks and there isn’t any risk of loss. All checking and savings accounts are insured through a government organization called the FDIC (Federal Deposit Insurance Corporation). The deposit insurance covers each account up to $250,000.
Cons. Even if you’re using a high-yield checking and savings account, you’re likely receiving less than about 1% interest. Inflation is a nasty, hidden force that can eviscerate your savings. For the month of April 2014, inflation in America was about 2.0%. Effectively, just holding it in a bank account will cost you 2% or more if inflation becomes worse.
In the stock market?
Pros. Benjamin Franklin really said it best, “A penny saved is a penny earned.” Now that I have some savings, I’d like to make the most of it. I want to send my dollars out to work for me. I opened a couple financial accounts, one of which is an E*TRADE brokerage account. With low transaction fees and commission-free ETFs, this was an easy decision. I’ll be making about 7-10% per year, and attempt to invest in high dividend stocks. This method defeats inflation and puts it to work, as I build a little savings.
Cons. Of all the methods mentioned, this is definitely the riskiest. Investing is not free from thievery and scum; hell, I’d prefer a burglar sometimes, as they do less damage. The Dow Jones fell over 50% during the most recent bubble and crash. (Interested in getting an in-depth understanding of the crash? I highly recommend reading The Big Short by Michael Lewis.) Most investors were decimated by the stock market’s movement, which was caused by bubbling housing prices, credit default swaps, and a variety of predatory practices by big banks. By joining this arena, I’m exposed to criminals on the grandest scale.
There’s no perfect, safe place to store and build a savings. Every option contains risks, and it’s important to consider each and every one of them to make the smartest decision for yourself. For me, I’m taking risks and putting my money in the market. I’m young and looking to put my money to work as fast as possible.
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