You’ll often hear that saving money is your ticket to growing wealth. And there’s certainly some truth to that.
If you spend your entire paycheck month after month, you may have a hard time meeting your financial goals. That’s why it’s a good idea to set money aside on a regular basis so you can grow wealth over time.
But should you stick all of your money into a savings account? Believe it or not, you shouldn’t.
Savings accounts are a great home for your emergency fund — the money you need on hand to cover unplanned expenses. But once your emergency fund is complete, it’s a smart idea to invest your money so it grows into a larger sum.
It’s a tactic wealthy people employ all the time. In fact, you’ll often find that rich people actually only keep a small portion of their money in the bank. Instead, they put the bulk of their assets to work by opening brokerage accounts and investing in things like:
And if you want to increase your chances of becoming wealthy, it pays to do the same.
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Don’t just stick to savings
Today’s savings account interest rates are downright abysmal. But even during periods when savings account rates are more generous, they still tend to pale in comparison to the returns you might generate in a brokerage account.
Say your emergency fund is complete and you have $10,000 on top of it. If you were to put that $10,000 into a savings account paying 2% interest, you’ll earn $200 a year. But if you were to invest that $10,000 in a brokerage account and snag a 7% average annual return, which is actually several percentage points below the stock market’s average, you’d earn $700 a year instead.
But here’s the best part. Not only can investing put more money in your pocket year after year, but it can also give you more money to invest with. Going back to our example, the $700 return you generate in your brokerage account is money you can then reinvest so your balance grows even more.
In fact, say you’re able to invest $300 a month over 20 years and you snag a 7% average annual return in your account. At the end of that window, you’ll be sitting on roughly $147,600. That’s more than double the $72,000 of your own money you’d wind up putting in. And the reason you’re able to turn $72,000 into $147,600 is by generating strong returns on your investments and reinvesting your gains year after year.
By contrast, if you were to save the same amount over the same time frame in a regular savings account paying 2% interest, you’d wind up with just around $87,500 after 20 years. Is that more than the $72,000 you’d be putting in? Yes. But it’s a lot less than $147,600.
It’s this very strategy that wealthy people employ all the time, and it also explains why their savings account balances may not be as robust as you’d expect. So if you’re sitting on extra money you don’t need for emergencies, consider opening a brokerage account and buying some stocks or cryptocurrencies. You can also look at buying real estate, but purchasing physical properties is more complicated than investing in stocks and digital coins, so if you’re first starting out, those may be a better choice for you.
Of course, one thing you should know is that all investments come with risk, whereas any money you put into a savings account is protected (up to $250,000 per depositor). But in exchange for taking on risk, you could be well-rewarded. So if you want to be like the wealthy, investing is the way to go.
View more information: https://www.fool.com/the-ascent/cryptocurrency/articles/why-rich-people-often-have-very-little-savings/