Saving money is something that a lot of people want to do. But when it comes to where to put it… That’s a whole different story. Countless professional investors and bloggers will tell you that you should invest in nice safe mutual funds, or even a high yield savings account, because these investments typically return between 1 and 5 percent annually, and they are historically safe. But there is a lot more to the story when it comes to picking the best place to save money.
So first off we have to understand inflation to be able to get a hold of this. In 1971 President Nixon separated the U.S. dollar from gold backing by making it a currency. This is extremely important, because it meant that the dollar was no longer tied to a physical value, which means that the government can print as many dollars as the want. This wouldn’t be a problem in and of itself if they were to keep the same number of dollars in circulation, but they haven’t. Every year the U.S. government prints more and more money. The result is that with each passing year the value of the dollar goes down. So what was once 100 dollars a year ago, would take 102 dollars to buy now (assuming 2% inflation)
So what is the inflation rate? They say it’s 2.9%. Which means that any investment that is done based off of U.S. dollars is going to be affected by that. So if you were to invest in a nice safe mutual fund which on average gets 5% interest, at the end of the year inflation would have eaten 2.9 percent of the profits, which leaves you with a measly 2.1 percent return. Which means that it would take roughly 34 years for it to double in purchasing power. So to have a decent retirement would take you putting in 250,000 dollars today, then waiting nearly 70 years before you were to start drawing from it.
From there it gets even worse. Because the government as it turns out doesn’t like to tell people the whole truth about inflation. The generally low ball the numbers, because if they were to tell the truth most people would be quite upset. If you take a look over here, you’ll see that by measuring the actual buying power of the dollar you get something more like 6.3% inflation. Now if that’s the case, then the same 5% investment would actually lose 1.3% of it’s value annually! That’s not what I call a good investment.
Don’t believe it? Well take a look at oil prices. 20 years ago oil was around 22 dollars a barrel. That’s not too bad. But as of today it’s around 74 dollars. Which means that in 20 years the cost has nearly tripled. In order for that to be the case inflation would have to be somewhere around 5.6%. Now economists will tell you that oil prices don’t affect inflation, but I don’t buy it, because if you look at gold it’s even worse. Over the same period of time it’s more than quadrupled in cost, which doesn’t make sense considering there’s more gold in circulation now than there was then. So if this is true, then I really want to factor it in when considering what is the best place to save money.
What Do You Want In Your Saving’s System?
Really there are two aspects to consider when trying to figure out the best place to save money.
Not Affected By Inflation
The first thing you want to know is that your savings are not going to be affected by inflation. The only way to assure this is to turn your money into something else. Any physical item will be affected by inflation in the opposite way. It doesn’t matter what it is, if you buy a toilet, and inflation increases the price of toilets, then when you sell the toilet you’ll get more money. It doesn’t matter if inflation is 1,000,000% it will go up. But there’s a little more too it than that. Just because the value of the item has gone up with inflation, the actual value of the has not. So it’s really only a good way to hedge against the decrease in value of the U.S. dollar.
High and Stable ROI
The return of investment is where you are going to make your money. This is where whatever it was that you bought continues to bring in money, day after day, year after year. If your investment doesn’t actually produce something, then it’s only going to stay where it’s at in value.
Places Not to Save Your Money
With those concepts in mind, let’s take a look at some of the worst places to put your hard earned cash.
Under the Bed
Just saving cash, (or putting it under the mattress) is one of the worst things you can possibly do. You aren’t getting any interest on the money, and on top of that, inflation cuts the value every single day. So don’t do this, it may not be going anywhere, but this is definitely not the best place to save money.
High Yield Savings Account
I have heard so many people say that this is one of the best places to put money, but if you think about it, it’s one of the worst. Here’s the deal, yes you are getting interest, but not much. A good account will net you 1% yearly. Which is, even under the most conservative estimates, 1.8% less than the inflation rate. So while the amount in the account is going up, the actual value in the account is going down. That’s doesn’t sound like a good investment to me.
These would be anything like mutual funds and bonds. Don’t get me wrong, they definitely have a better ROI than a savings account, but it’s still not enough to really make it worth your while. And if the dollar hyper-inflates, the value will drop like a rock. Which will basically mean that you lose everything you put into one of these.
Gold isn’t inherently bad, in the sense that the value of it keeps going up. However the problem here is that gold’s value is what the value of gold truly is. So it’s tethered to inflation. It most likely wont lost any money over time, but it’s really not going to gain anything over time either. The same thing can be said of other commodities. They are a relatively safe place to save money, but they don’t really offer a return.
The Best Place to Save Money
So let’s get this straight, you want a place that is not affected by inflation, and has a decent ROI, and at the same time has relatively low risk. Well I can really only think of one thing.
Rental properties really are one of the absolute best place to save money. Historically rentals have made their owners 10% of the value of the property every year, and that’s after upkeep. Plus inflation increase the value of the property instead of decreasing it.
Supply and Demand
There is another interesting piece of information here too. Real estate continues to go up in value, faster than inflation. That sounds odd, but when you think about it, it makes sense. See there is only so much land, and as the population of the earth continues to grow, there is relatively less acres per person. So the demand for land goes up, while the supply goes down. That is a recipe for profit.
But What About the Risk?
Don’t get me wrong, when considering the best place to save money, risk is a factor, and there is risk here. Especially if you only have one or two properties. There can be problems evicting tenants who just wont pay, and there’s a chance they may damage the property in spite, but there is something you can do about that.
Don’t buy slums! If you really want to make this work, then focus on middle class homes or business properties in good neighborhoods. I know it’s tempting to get your foot in the door with a cheap property, and a lot of people have done well with that, but don’t. There’s a reason why they are cheap. Bad tenants will ruin a building, and I don’t just mean dropping a pizza on the carpet. I’ve know people who had their renters take an iron and melt a chunk of the carpet in every room, just so that it would have to be replaced. And there are countless stories of people ripping all the copper out of the walls. Then there’s vandalism that the tenants didn’t even do! So do yourself a favor and skip these.
Now you might be thinking of getting together with a group of people and investing in something more expensive. But there’s a limit here. Eventually people get so rich, they don’t need to rent. Once you hit that threshold, it’s practically impossible to find someone who is willing to pay you each month to live there. So keep it in the sweet spot, not too pricey, but not so low that people are going to trash the place.
Remember, the best place to save money, rarely has collateral damage.
But What if I don’t Have 140,000$ to Buy a Rental Property?
Ok that’s a legitimate question. But there are a couple of answers that can help out.
Join Investment Groups
There are tons of groups out there which will allow you to get a piece of the action without having to drop hundreds of thousands of dollars. Though the smaller ones are typically hard to find. You might have luck checking out the real estate investment clubs nearby. They are a great place to network.
It’s relatively new to the game, but crowdfunding real estate has become big business. They usually allow you to invest with significantly less up front, and pay quite well. Here’s a good list of crowdfunding sites.
Real Estate Investment Trusts have been around for a long time, and traditionally do quite well. Although, because they do literally all of the work for you, they don’t always make the 10% interest that your average real estate investment will. They are usually stable, but a few have been known to crash. I would research the history of whatever one you are looking at thoroughly.
So there you have it, the best place to save money. It’s not what your typical financial advisor will tell you, but it’s hard to argue with the numbers.
If you are looking for more ways to save money then make sure check out this article How to save money. It’s chock full of tips to make your dollars go farther.