I’m going to share a financial “secret” that was a hard-earned lesson for me, and I’ll bet it’s something you’ve never thought about either.
When I started my first business, I felt like a financial rock star just because I had a savings account. Every time I made a deposit, I’d see that number get bigger and feel a little bit safer. It was my rainy-day fund, my emergency money, my security blanket. I was doing the “right” thing, just like my parents told me to.
But I was wrong. I was not a financial rock star. I was a well-intentioned, hard-working person who was playing a game I couldn’t win. I was making deposits, but I was actually losing money.
The Insight: The silent money eater
There’s a sneaky little monster out there called inflation. You can’t see it, but it’s always hungry. It’s that invisible force that makes a gallon of gas or a carton of eggs cost more every single year.
While you’re feeling good about that number in your savings account, inflation is quietly munching away at your money’s buying power. A traditional savings account gives you a pathetic interest rate, like maybe 0.1% or 0.2%. I mean, seriously, what’s that? It’s basically an IOU from the bank saying, “Thanks for the free loan.”
Meanwhile, inflation, over time, chews up 2% or 3% of your money’s value every single year. You’re earning less than you’re losing.
Think of it like this: If you put $1,000 in a traditional savings account today, in ten years, that money might still be “worth” $1,000 on paper. But it’ll only be able to buy what $800 or $750 could buy today. The number is the same, but its power is gone. You’re not saving; you’re just slowly bleeding value. It’s like pouring money into a glass with a slow, invisible leak.
The Perspective: The bank’s secret playbook
For a long time, I thought a savings account was the pinnacle of financial responsibility. It’s the “safe” place to put your money. But it’s only safe for the bank.
Here’s the dirty little secret: The bank takes your money, which it pays you almost nothing for, and then it turns around and loans that money out for much, much higher interest. That difference is their profit. They want you to believe a savings account is your best option because it’s their best option.
The interest a bank gives you on a savings account is always, without exception, the absolute lowest return you can get. It’s a penalty for being too cautious. And once you see that, you realize you have to break up with your savings account, at least for any money you’re not going to need in the next six months.
This isn’t your fault. We were all taught to save and be responsible. But the old rules of saving just don’t work anymore. You’re a smart entrepreneur, a savvy professional. It’s time to play by the new rules.
The Action: Your simple, “do-able” escape plan
I know this might sound scary. You’ve worked hard for your money, and the last thing you want is to lose it. So, let’s make this simple and easy. We’re not going to gamble with your life savings; we’re just going to make your money work harder than a savings account does.
Step 1: Your emergency fund stays
First, keep a few months’ worth of living expenses in that savings account. This is your true emergency fund. The money you might need tomorrow, next week, or next month. This is the only money that should sit there.
Step 2: Put the rest to work
For the rest of your savings (the money you don’t need for an emergency), let’s put it to work. You’ve got options, all of which are very low-risk compared to the money-losing trap of a savings account.
- If you’re a little cautious: Start with Certificates of Deposit (CDs). A CD is just a promise from a bank. You give them a certain amount of money for a set period (like 1 year), and they give you a much higher interest rate than a savings account. A great strategy is to “ladder” your CDs. Say you have $5,000 to invest. You can put $1,000 into a 6-month CD, $1,000 in a 1-year CD, $1,000 in an 18-month CD, etc. That way, money is always becoming available, but all of it is earning more than it would in a savings account.
- If you’re okay with a bit more stability: Consider bond index funds. Bonds are basically loans to a company or a government. They are generally much more stable than stocks. A bond index fund is just a big basket of these bonds, which diversifies your risk and gives you a much better yield than a savings account. You can easily set this up through an investment company.
- If you’re ready for long-term growth (10+ years): Consider a broad-based stock index fund. An index fund is a type of investment that holds a little bit of many different stocks, like a basket of all the biggest companies in the market. The S&P 500 index fund is a perfect example. You’re not picking individual stocks, you’re investing in the overall growth of the economy. Historically, this has proven to be the most powerful way to grow your money over the long haul.
Your journey to financial independence doesn’t start with a million-dollar idea. It starts with one small, smart decision. The first is to stop letting your money die a slow death. Let’s make it work for you, starting today.
You’ve got this!
-Mike
PS. You can preorder The Money Habit today! Click here.