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You will never build wealth by just saving money.
In fact, if you keep saving, you will go broke.
I can not stress this enough. I am determined to ring this bell until everyone in the world hears it.
Too many people in this world don’t understand how their money works. It is why I believe personal finance should be taught in every middle and high school across America.
Let’s change that.
I am going to give you the reasons why just saving your money will destroy you financially. It is not a pretty picture. The best part is, it is never too late to change your plan.
I will also show you what to do with your money instead of just saving it, so you can build wealth.
Inflation Will Eat Away Your Savings
Inflation has not been as aggressive as it used to be. In fact, in the last 20 years it has risen a little over 2%.
This is why leaving your money in a savings account is a terrible decision for your finances. Interest rates are not what they used to be. So you are losing ground on you money every single year.
Most traditional big banks offer very small interest rates. Usually much less that 1%.
All the while, your money is losing over 2% of it’s value to inflation.
This is not a winning formula. You are losing money.
There are two rules of personal finance:
Rule #1 of personal finance is don’t lose money.
Rule #2 is see rule #1.
Your savings will never outwork inflation. It is a losing battle. Don’t allow your buying power to go down every month.
If you must keep your money in a savings account. I recommend the high interest online saving account at CIT Bank.
Yet, the only time I recommend this is for emergency funds or big purchases.
You Can Never Outwork Your Money
If you put your hard-earned cash in a savings account for years, your money will work against you instead of for you.
Every day you save your money, inflation is eating away at your money. Taking small bites of the pie every day. Eventually, you will have no pie left.
Make this ring in your head. You can never, and I mean never, outwork your money.
Compound interest is an amazing thing. As your money begins to grow, it produces more money. That new money mixes with old money and produces more money.
This begins to snowball.
Over time, compound interest can turn from a snowball to an avalanche.
Eventually, when your money grows enough, it will replace your income.
At that point, you are financially independent. You don’t have to trade your time for money anymore. Now, you get to live your life on your terms.
This is extremely powerful.
This is why understanding how to handle your finances is so important. The earlier you figure this out, the faster you can get to work on becoming free.
It’s Not How Much Money You Make
Increasing your income is crucial to your financial success. It is the pathway to never having to cut back on lattes. Or being able to read a menu from left to right instead of right to left (think about it).
Increasing your income should be your focus, but it is not what makes you financially successful.
Say this with me. It is all about how much of your income you keep.
This is why pro athletes that make $100 million go bankrupt. They don’t keep any of their money. They spend it all.
It is also why if you see a person driving a ferrari, your first thought should not be, “Wow, they must be wealthy.
If that person spends all their money on cars and houses. They are completely and utterly broke.
Trust me this happens. I know people who make $600K a year and when the recession hit, they started running out of money at a rapid pace.
Making money is the easy part. Developing a system to keep your money is a different story.
How much of your salary you keep and invest determines your wealth.
If you increase your income and continue investing a large portion into assets, you will build wealth.
You will Never Save Enough to Live On In Retirement
Let’s say, you work for 30 years and happen to put together a million dollars. An amazing accomplishment to say the least. To do this you would have to save 33,333.00 per year for 30 years.
Now, over the years, you’ve kept that money in a good old fashioned savings account. You don’t like risk, and this to you was the only sure thing.
You finally reach retirement at the age of 60. Wahoo!
You need 6,000 a month to live with you and your spouse. You want to travel and do all the things you couldn’t when you were saving all this money.
You figure you will live to 90 and that money will last you over the years right?
Let’s find out:
| Age | Money Left | Yearly Spend |
| 60 | $928,000.00 | $72,000.00 |
| 61 | $856,000.00 | $72,000.00 |
| 62 | $784,000.00 | $72,000.00 |
| 63 | $712,000.00 | $72,000.00 |
| 64 | $640,000.00 | $72,000.00 |
| 65 | $568,000.00 | $72,000.00 |
| 66 | $496,000.00 | $72,000.00 |
| 67 | $424,000.00 | $72,000.00 |
| 68 | $352,000.00 | $72,000.00 |
| 69 | $280,000.00 | $72,000.00 |
| 70 | $208,000.00 | $72,000.00 |
| 71 | $136,000.00 | $72,000.00 |
| 72 | $64,000.00 | $72,000.00 |
| 73 | -$8,000.00 | $72,000.00 |
| 74 | -$80,000.00 | $72,000.00 |
| 75 | -$152,000.00 | $72,000.00 |
| 76 | -$224,000.00 | $72,000.00 |
| 77 | -$296,000.00 | $72,000.00 |
| 78 | -$368,000.00 | $72,000.00 |
| 79 | -$440,000.00 | $72,000.00 |
| 80 | -$512,000.00 | $72,000.00 |
Houston, we have a problem.
As you can see, you will be dead broke by age 73. Just when you are hitting the prime of your retirement. This is a major problem.
Before we go any further you may say $6,000 is a lot of money in retirement. Remember, your buying power is getting swallowed every year by inflation.
Even if your house is paid off and you get some social security. Odds are, you will need more than this in retiremnet.
Why?
The price of groceries, medicine, electricity, water, clothes, and any other necessities will all cost more.
But I will entertain your idea, to get the point across. Here’s what happens if you only need $4,000 a month:
| Age | Money Left | Yearly Spend |
| 60 | $952,000.00 | $48,000.00 |
| 61 | $904,000.00 | $48,000.00 |
| 62 | $856,000.00 | $48,000.00 |
| 63 | $808,000.00 | $48,000.00 |
| 64 | $760,000.00 | $48,000.00 |
| 65 | $712,000.00 | $48,000.00 |
| 66 | $664,000.00 | $48,000.00 |
| 67 | $616,000.00 | $48,000.00 |
| 68 | $568,000.00 | $48,000.00 |
| 69 | $520,000.00 | $48,000.00 |
| 70 | $472,000.00 | $48,000.00 |
| 71 | $424,000.00 | $48,000.00 |
| 72 | $376,000.00 | $48,000.00 |
| 73 | $328,000.00 | $48,000.00 |
| 74 | $280,000.00 | $48,000.00 |
| 75 | $232,000.00 | $48,000.00 |
| 76 | $184,000.00 | $48,000.00 |
| 77 | $136,000.00 | $48,000.00 |
| 78 | $88,000.00 | $48,000.00 |
| 79 | $40,000.00 | $48,000.00 |
| 80 | -$8,000.00 | $48,000.00 |
You are dead broke by age 80. You will have no money to leave your kids, spouse, or grandchildren.
Why work your butt off and have nothing to show for it.
All while saving $33,333 a year while working for 30 years. That’s almost $3,000 a month!
If this is your first time coming across something like this you may be panicking.
How will I ever retire? Do I have to work until I die? I can barely save $1,000 a month let alone $3,000.
No, you will be able to retire. In fact, you may be able to retire earlier than you ever thought possible. All while saving less money. Let me show you how.
How to Make Your Money Work For You
You have to invest your money into cash-producing assets. Let me show you why.
Let’s say you save the same amount as our previous example. 33,300 per year into an index fund. On average, an index fund earns roughly 7% per year. Here is the difference:
| Year | start balance | end balance |
| 1 | $0.00 | $34,355.32 |
| 2 | $34,355.32 | $71,115.52 |
| 3 | $71,115.52 | $110,448.93 |
| 4 | $110,448.93 | $152,535.68 |
| 5 | $152,535.68 | $197,568.51 |
| 6 | $197,568.51 | $245,753.63 |
| 7 | $245,753.63 | $297,311.70 |
| 8 | $297,311.70 | $352,478.85 |
| 9 | $352,478.85 | $411,507.69 |
| 10 | $411,507.69 | $474,668.55 |
| 11 | $474,668.55 | $542,250.68 |
| 12 | $542,250.68 | $614,563.55 |
| 13 | $614,563.55 | $691,938.32 |
| 14 | $691,938.32 | $774,729.33 |
| 15 | $774,729.33 | $863,315.71 |
| 16 | $863,315.71 | $958,103.13 |
| 17 | $958,103.13 | $1,059,525.68 |
| 18 | $1,059,525.68 | $1,168,047.80 |
| 19 | $1,168,047.80 | $1,284,166.47 |
| 20 | $1,284,166.47 | $1,408,413.44 |
| 21 | $1,408,413.44 | $1,541,357.71 |
| 22 | $1,541,357.71 | $1,683,608.08 |
| 23 | $1,683,608.08 | $1,835,815.96 |
| 24 | $1,835,815.96 | $1,998,678.41 |
| 25 | $1,998,678.41 | $2,172,941.22 |
| 26 | $2,172,941.22 | $2,359,402.43 |
| 27 | $2,359,402.43 | $2,558,915.92 |
| 28 | $2,558,915.92 | $2,772,395.36 |
| 29 | $2,772,395.36 | $3,000,818.36 |
| 30 | $3,000,818.36 | $3,245,230.97 |
| www.DollarAfterDollar.com |
Or, here’s the visual chart:
The same amount invested would be $3.2 million!
That is the power of compound interest!
Not only will you preserve this money in retirement when invested, you will also have the opportunity for this money to grow. How much can you take out per year?
3.5% to 4% is a good rule of thumb to stick to. This is based on a study of wealth preservation that I go into detail about here.
So for every million dollars invested, you can draw down $40,000 per year in retirement.
What You Should Invest In
There are so many ways to invest your money it can be tough to decide what the best options are. Here is a breakdown of what I think the best places to invest your money are (in order). If you don’t have a brokerage account, I recommended M1 finance as the best option.
Index Funds (Passive)
Index funds can be a set and forget it system to invest your money. If you buy a total stock market index fund, you are literally investing in the entire stock market. It doesn’t get more diversified than that.
Index funds like VTSAX (Total Stock market Index Fund) have returned 7%-8% over the course of their existence. This is exactly where the numbers in the how to make money work for you chart are taken from.
Best book on index investing (and many other financial independence topics(: The simple Path to Wealth By J.L. Collins
Real Estate
Real estate is an absolutely wonderful way to invest your money. I have made a lot of money fast by investing in cash flowing rental properties and flipping houses.
Real estate requires you to know what you’re doing. Don’t just go buy a house and hope it rents for enough to cover your costs.
You have to have an understanding of the market, expected repair costs, insuraurance, taxes, capital expenditures etc.
It is also important to have a system in place to run the numbers. Otherwise, you can get burned.
It is a fantastic way to make consistent cash flow even during recessions. You just need to have an understanding of how the numbers work.
The same goes for flipping houses. It is all about the numbers. You need to understand repair costs, after repair value, lending, and have a buffer plan for unexpected expenses.
If real estate interests you, read books, listen to podcasts, and attend some local real estate meetups. You will learn a ton of valuable information quickly if you put in the time. It took me a few years before I took the plunge. You don’t have to wait that long. Once you are confident you have all the tools, knowledge, and have a team built, it’s a great way to invest.
Best Book in Rental Property investing: Brandon Turner
Best Book on the power of real estate: Rich Dad Poor Dad
Dividend Stocks
Dividend stocks are great for investors who want to add cashflow to their investing equation. Although I think it’s hard to beat index funds returns, dividend stocks are still a great investment.
Specifically, the dividend aristocrats.
These are companies that have increased their dividend for 25 years or more.
A dividend is a percentage of a company’s earnings paid to the shareholder. This shows that when you buy a share of a stock, you are a part owner.
The company is sharing the wealth with you.
You do have to have some market knowledge to invest in dividend stocks. This is because you have to choose individual companies to invest in and must make the right decision. If you are interested check out the dividend diplomats. They are one of the best resources for dividend investing.
Best book on Dividend investing: The Single Best Investment
Other Ways to Invest
This is not the end all be all of investing. There are a number of other ways to invest that are profitable. Here are a few examples. Each of these investments takes expertise and understanding if you are investing outside of an index fund.
- Value Investing
- Real Estate Investment Trusts (REITS)
- Growth Stocks
- Bonds
Isn’t the Stock Market like Gambling?
Maybe you lost money in 2009 during the great recession and still have bitterness or cold feet when it comes to the market. I challenge you to take a look at your best investments. Where would they be now if you did not sell?
I can bet all the good solid companies are sky high.
Investing is a practice that requires emotionless discipline. You must remove your emotions.
Selling when the market is down means you lose. You will never make money that way. There’s a reason why the most common quote in investing is buy low, sell high.
Think about an index fund, VTSAX, which allows you to buy the entire stock market.
You are literally betting on America.
That is a bet I would take every single time. If it helps, take a look at the below chart of the S&P 500 since the great depression.
There are countless dips, recessions, depressions, and bumps in the road. But, over time, the market always goes up.
You just have to have the fortitude to stay in the market when times are tough in this country. Recessions are expected. You just have to stick to your long term plan.
Final Thoughts
Just saving your money will destroy you financially.
Inflation will eat away your savings and devour your purchasing power. Saving your money in cash is not an option because of inflation.
You can never outwork your money. Once the snowball of compound interest gets to work, your money will produce more money. It’s an amazing phenomenon.
It is not how much you make, it is how much you keep. Increasing your income is only half the equation. Keep that money by automating your savings.
You will never save enough for retirement. Invest the money to maintain your lifestyle.
Instead make your money work for you by investing in stocks, bonds, real estate, or a combination of all 3!
If you don’t have a place to buy stocks yet, I recommend M1 Finance. You can track all your investments in the free app Personal Capital.
Andrew is the host of The Personal Finance Podcast, a show that is changing the way you think about your money. His primary goal with the podcast is to bring as much value as possible to his listeners.
Andrew's favorite free financial tool he's been using since 2014 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
His favorite investment platform is M1 Finance, a site that allows him to build a custom portfolio of stocks for free. It has no trading fees and is his preferred way to invest without having to lift a finger.
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