Many of my good friends say that I’m broke because I never have much cash savings. They say that one day I will regret not putting enough cash aside for those difficult times. What is amazing to me is these “advisors” always seem to have a mortgage on a home, and they’re paying more in interest to the bank than the bank is paying on their cash.
I’m not saying that you shouldn’t have a savings plan or that you shouldn’t put aside money for a rainy day. I advocate for what I call smarter-than-cash savings. So what is “savings” if it’s not a bunch of stored cash in a bank account or safety deposit box at your local branch?
First, let me give you some insight on the U.S. Dollar. The dollar slides, or loses value, at least 2.1% each year (the technical term is inflation). In some years it goes much higher. But for easy mathematics almost anyone can understand, we will use 2% as the number. I deposit $100,000 into a savings account. I’m lucky and my bank pays 1% interest (APR) on the cash I deposit. Take a look at the value chart here:
Year 1
$100,000 +$1,000 (interest) = $101,000 (available cash)
-$2,000 (lost to inflation) = $99,000 (actual purchasing power)
Year 2
$101,000 + $1,010 (interest) = $102,010 (available cash)
-$4,020 (lost to inflation) = $97,990 (actual purchasing power)
Year 3
$102,010 + 1,020.10 (interest) = $103,030.10 (available cash)
-$6,080.60 (lost to inflation) = $96,949.50 (actual purchasing power)
Each year your balance goes up, while the actual value of what you can purchase goes down substantially. If you don’t believe in this model, visit your local grocery store and begin to write down the prices of eggs, milk, and bread. Keep track of those for three to five years, and you will see the price increases at a minimum of 2% every year. Or, even worse, the prices will remain the same while the weight of the food you receive becomes less and less. This is happening in the cereal market. They are packing less and less cereal into those boxes to keep prices “stable.”
So if savings don’t save you money anymore, how do you hold on to your “money?” Notice I used the term money and not cash? Money is anything that is a store of value. Gold and Silver hold value well. Just don’t go and buy a Cartier watch and think it will increase in value. That is Jewelry. I mean the type of Gold or Silver that comes in bars or coins. Investing in these things will hold (and even gain) value as the government continues to print and spend. Also, bitcoin will increase if you purchase it at the right price. Just beware that it is harder to sell than gold bullion and is highly volatile. Bitcoin is for the more seasoned investor or for those that have extreme patience.
Also, think about your home. If you owe $300,000 and you have $100,000 in cash in the bank, it would be better to take $80,000 and pay down your mortgage. It will save you a ton of interest and give you more equity in something that increases over time. You can also borrow against the equity in an emergency. The faster you can pay off your home, the better. It is a substantial investment but also a killer to any savings plan you may have. Although the interest rate may be low, it is drawn out over 15-30 years and can cost you hundreds of thousands of dollars in the end.
Raw property almost anywhere in the United States is also a great store of value. You can locate tracts of land in rural areas for as little as $10,000. Yes, you will probably have to pay some taxes on that property each year. But the increase in the value of the property can be 4-5% or more a year. You can also rent the property to farmers or build a small home and rent it for income. Also, look at stable Caribbean markets like the Dominican Republic. You can legally own land overseas, and in some places, the gains are higher than the US and carry little to no taxes.
This brings me to another intelligent use of capital. Use your “savings” to purchase a second home. Then, become a landlord and rent out the property. Even if you make loan payments on this second home, the renter will pay all or most of the mortgage payment. Your second home will increase in value. Your Net Worth will increase instead of decrease.
I often hear the term “play it safe” when it comes to savings. This means you deposit your money in the savings account each month and be super safe about not touching it. Guess what? You’re not safe. You are Losing Value. What is secure about losing at least 1% value a year as you grow old? Safe would be super-low risk stocks on the stock market. At least this way, you earn a tad over the value to loss ratio each year.
Also, one last thing you can do is to purchase Whole Life Insurance. Believe it or not, these insurance giants pay good interest if you invest monthly and hold for 20-30 years. The cash-based results can be very lucrative. Please speak to an insurance agent about their plans. Make sure the program is AAA-rated. Don’t go for anything less. New York Life is an excellent example of a well-funded, AAA-rated life insurance company.
I hope this gives you a little insight into how to save without losing value. You don't want to retire with a bunch of cash that isn't worth the paper on which it is printed.
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-Lonnie Passoff
Founder and President
About the Author:
Lonnie Passoff started the first-ever internet-only eCheck processing firm in 2008. It has grown to be the largest eCheck processor on the planet. A veteran of the United States Army, he has become a multi-millionaire through honest, smart business practices. He frequently speaks at business conventions and is a paid advisor to multiple corporations. He also holds a seat on the board of a Real Estate Investment Trust and a non-profit Clean Ocean Initiative in the Caribbean.