The Problem with Savings

 

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Hello everybody. It is Financial Free Guy again. You can always be sure to get some good tips from this little website: Lscheer.com. Now, I am going to tackle a problem that is very common in the environment today, and that is called savings accounts. Many people value the traditional method of “save, save, save until it hurts”. This is good for those who do not know what it means to invest and are forced to rely on the government or some other human being, who must be able to care for themselves and someone else now. Before I make my argument, I just want to say that I have no problem with savings in certain methods. I think in terms of wealth, and savings just to save is not what I support. You could save if you do not know any other method. It is better than nothing; it reminds me of taking a knife to a sniper rifle fight in the middle of a city in the desert. You can do some damage with a knife; you will most likely get obliterated from the distance, though. I save my money to make investments. I do not rely on saving money just to save money and retire on a nest egg. The problem with savings is that it is never enough to last a person’s entire retirement. Sure, there are doctors who command salaries of up $500,000 a year and save enough money over twenty years of service to accumulate a nest egg of approximately $4.5 million or $5.0 million. That is a nice sum of money by most people’s standards. You could do the traditional safe withdrawal rate of 4% or even 3% by some financial pundits. That equates to $135,000 at a minimum a year to live on. That is not bad, especially since that is more than the average American’s salary. The problem with that is that $135,000 will not do as much damage 20 years later when you retire than if you were to use it now.

To make things relatable, look at this familiar example. If you bought a $135,000 house, what do you think will happen to the house’s value 20 years from now? It will most likely rise. There could be a housing crash (more on that later), which would ruin its value, and for the most part the value goes up (similar to gambling). Therefore, do you think if you saved $135,000 and wanted to buy the same house 20 years later (assuming there is no housing crash), that you would be able to buy it? Most likely, you would not. Therefore, it would probably be smart of you to obtain that house for $135,000 to purchase a home that is five times that amount, $675,000, using the bank’s money, or invest that money into any number of properties that add up to using $135,000 (five properties valued at $135,000 where you put in $27,000, three properties where valued at $225,000 where you put in $45,000, or any other combination etc.). The point is to spend that money and invest it, because the money you obtain from the properties will allow you to get a hedge against the inflation. For example, if you decide to invest in five properties valued at $135,000 by using $135,000 of your own money ($27,000 per property while the bank invests $108,000 per property), and obtain a rental income of $1,000 per month, you will obtain a 44% return on investment ($1,000 per month x 12 months equals $12,000 per year), and return of investment equals (Income/Investment), which makes the ROI for this equation ($12,000/$27,000 = 44.4%). The ROI is 44.4%, which is much higher than putting that same money in the bank, where your ROI is not even 1%. Your will recoup your money in a little over two years ($27,000/$1,000/mo = 27 months, which is 2.25 years). How quick will your money recoup if you decided to invest it in a savings account? It would probably be more than 2.25 years. In other words, when you invest your money into a savings account (you are loaning your money to the bank at a very low interest rate, by the way), how long would it take for that $100,000 to become $200,000? It probably may not even happen in your lifetime. When you decide to invest the $135,000 into five separate properties like we mentioned earlier, you would be able to recoup each of your $27,000 investments within 27 months, or 2.25 years. That sounds like a great investment versus a savings account with the sole purpose of saving.

 

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