The topic of investing your hard earned income can be one filled with anxiety and confusion. To the average, middle income family in the US, outside of a work related 401k, there are typically no other investment vehicles in place. The majority of middle class America does not take advantage of IRA’s (Individual Retirement Accounts) as well as other investment vehicles. For the most part, they keep there money in low rate of return bank savings accounts, CD’s (Certificate of Deposits) and money market accounts. The prevailing belief and thoughts process is these vehicle provide some growth while protecting the principle (money originally invested) from loss. But there is flaw is this method of thinking. Look at the example provided below:
Let’s say I have $100,000 in the bank and I place it in a CD. The terms of deal are the bank will provide me with a guaranteed 1.75% rate of return in 13 months in addition to protecting the original $100,000 from loss. I cannot access the money within the 13 months or I will pay a(n) early distribution penalty. So, at the end of 13 months my 100k produced $1897.21 in interest giving me a grand total of $101897.21. To the average consumer, this doesn’t look too bad.
However, when you take into consideration the cost of inflation which has averaged 2.05% in the last 10 years, the equation produces a different outcome. Inflation is what hinders your money’s purchasing power.
Now let’s take a look at the same scenario listed above and add the cost of inflation into the mix. $100,000 invested for 13 months in a CD at 1.75%. Inflation is 2.05%. In actuality, this CD’s true rate of return is a negative .03%. After 13 months of not having access to the money without penalty and taking inflation into consideration, my $100,000 is actually now worth $97,000. Knowing this, would you still leave your money in the bank?
Lack of knowledge is the main reason why so many Americans leave billions and trillions of dollars in the bank. The do not have access to expensive Financial Planners. Additionally, middle income American’s parents, who are the natural source of information for their children, also probably didn’t have the access to the necessary information for making a better decision on where to leave their money. If you would like a personalized retirement plan, please contact me directly via email at louis@louisromero.com
So what are some possible alternatives for one’s “nest egg”?
Stay tuned…