“We should have put the money in a sock under the bed,” my husband said when our stock portfolio, along with pretty much everyone else’s, took a nosedive during the 2008 financial crisis. A lot of people probably said the same thing that year as stock markets plunged seemingly overnight.
Could this be why a recent survey on the savings and investment habits of Canadians showed that nearly 30 percent of us don’t equate saving with investing – and a further 36 percent think saving is safer than investing. After all, nothing could be safer than a good old-fashioned bank account, right?
Wrong….very wrong…. If you’re saving for the long-term, your savings account is not your friend – in fact, it will make you poorer over time. It’s not just the bank fees – it’s inflation, the unavoidable rise in the cost of goods and services over time.
Inflation is why your kids would laugh at you if you tried to give them the same allowance you got when you were 10 (two bucks won’t even get your kid on the bus in most cities anymore!).
To see how much money inflation (combined with your bank savings account) can lose for you, let’s do some math. My savings account currently offers an annual interest rate of 0.25 percent – although my bank tells me if I maintain a balance of over $5000 they will give me the magnanimous gift of a 0.75 percent interest rate – wow! (note: I am being sarcastic here).
Let’s assume I take the bank up on this generous offer. In ten years my $5000 would be worth $5,387.91. Not great – but here’s where it gets scary. Adjusted for inflation at 3 percent (that’s the average rate over the 20th century) and I will lose money, with my savings shrinking down to $3,973.18. That’s a loss of over a thousand bucks in 10 years.
Still think putting your money in a savings account is safer than investing?
Next time you’re tempted to put your savings in a sock, consider the impact of inflation (and find a better savings account…).
Caroline Cakebread is a Toronto-based financial writer and editor. She’s also a recovering academic and the mother of two kids.