I answer your question about the difference between Saving Vs Investing, and then, explore the magical thing called compound interest! Join me here to discuss how value works in this quick and dirty video to help answer your question. Don’t forget too….
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For those who would like to also follow along with the video, or prefer to read the information, here’s the video script for reference:
What is going on crypto family? Recently we did a video about the different types of investments out there. There is a lot of fear around investing, so some people just put their money in the bank and “save” it there. If you watched our three part video series on the Fed and our inflation vid, then you’ll probably asking, what more can I do? The goal with this video is to explain the two different typical areas of thought: Saving Vs Investing, and then, to explore the magical thing called compound interest.
Whether you consider yourself a saver or an investor, we’re going to explore reasons why people do both.
So first off, what are some reasons people typically save money?
I think one major reason most people save money with a bank for example is because of the security and liquidity they offer. Most people believe their money is safe in a bank, cause you know, who wants to have their life savings hidden under their mattress where a fire or a thief can make it all disappear overnight… Plus, most banks (at least in the U.S.) usually give access to your money immediately, or within a week or two. This is very useful for day to day life and helps give us a sense of security.
This isn’t a bad thing either, Radio personality and Best Selling author Dave Ramsey encourages people to build an emergency fund that is liquid. This is incase something happens and you need money immediately. For example, lets say you have a car issue, something like your refrigerator breaks, or you have a medical issue pop-up, etc… this will cover it or at least a part of it… and this isn’t an uncommon idea either. David Bach recommends the same thing as do many financial specialists and even the U.S. Government says to ensure you have a certain amount of money on hand in case of a federal emergency or disaster. There is a general consensus that having some liquid funds is necessary and important for our daily lives, however, the amounts as to how much… change based on who you ask.
Even with the authorities and high profile financial experts telling people to have an emergency fund, there’s actually a lot of people who don’t have one. A semi-recent report published by The Federal Reserve on the economic well-being of U.S. Households in 2018 thru May 2019 showed that 40% of Americans would have difficulty covering a $400 emergency expense like those mentioned earlier. So this is one good reason to have savings. If you had all of your money in investments, it means you may have to sell at a market low or take a loss to get the money, which is obviously not ideal.
Another reason people may save is their timeline. If you are close to retirement age, you may be more cautious about investing in something that may be more speculative and choose to put more in savings vehicles with lower risk like CDs or Certificates of Deposit and Bonds.
Some people keep their money in savings due to lack of experience or knowledge. When some folks start hearing others talk about investing, ROI, percentages, and things like that, their eyes glaze over and they say things like, I’m not good at math.
This is where one form of investment comes into play—the type of investment that everyone can benefit from. Investing in yourself.
If you don’t understand investing, you owe it to yourself to at least learn the basics to see how you could benefit, plus learning this can help you make better decisions with your finances in the long run.
I encourage everyone not to just say, “that’s too complicated for me,” or “I’m not a math person.” Watch some videos, read a book or a two, consult with a financial professional, the point is, go out and learn more.
My Great Uncle Benjamin Franklin said it best – “An investment in knowledge pays the best interest.”
Now, let’s talk about something that once fully understood should make you excited!
Albert Einstein once said, “Compound interest is the 8th wonder of the world. He who understands it, earns it; he who doesn’t, pays it.”
So, what is Compound Interest and How does it work? Compound interest Is the interest an investor earns on his original investment plus all the interest earned on the interest that has accumulated over time. Simply put, it’s Interest on interest.
Here’s an example of simple interest vs compound interest…
Simple Interest: The interest earned on the original principal only. (Principle is the original amount). For Example: $10,000 at 5% for three years = $500/year for a total of $1500.
Now, If you invested $10,000 at 5% compounded annually:
The 1st year earns $500, the 2nd year $525, and the 3rd year $551.25 for a total of $1,576.25 in compound interest. You can see in this short illustration that with compounding interest you earn more than with simple interest. Where it gets interesting is when you tack on more time to the equation.
Let’s look at an example that is pretty typical and is doable by many households:
If someone invests $200/month at an average interest rate earned of 6% APR for 20 years, The principal would be at $48,000, and they would end up having $88,285.42 total. If this kept going for another 10 years at the same rate of $200/month the person would end up with around $189,739.65.
I know some of you viewers are young hustlers that are already looking into investing in your 20’s—so you’re looking at a whopping 40 year investing window possibly. Check this out. If you take the above example of just $200 a month and can find an investment vehicle that earns an average of 6% per year, each year for that 40 year time period, you’d be looking at $371,428.72.
Some people would say, well sure, you’re investing all of that extra money, but check it out. The principal, also known as the money you actually invested, is really only $96,000 on that $371k.
What about that 6%? Here’s where little changes in the percentage of returns makes a huge difference. Most people would think that 6-7% is not that big of a difference. The last example at 7%, would create a total of $479,124.27. So yeah, another $110k because of 1%.
Now obviously if you are saving in a normal savings account, you will definitely not get anywhere near 6-7%. So let’s check out one of the previous examples with savings vs investing.
If you invested $200 per month for 20 years in a savings account at an average of 1.2% (which is pretty good for a savings account), you would end up with $53,886.87, were that same money at 6% would end up at $88,285.42 like we mentioned earlier.
As you can see from all the examples, there is a huge difference between leaving your money in the bank for 1.2% APR or less, which in turn is going to make a bigger difference than those who invest their money for a higher return.
The choice, as always, is up to you. It depends on your risk tolerance, personality, stage in life, income, and overall financial situation.
There are a ton of different Investment vehicles out there, all of which offer various different possibilities for higher or lower rates of return, all with their own various risk profiles associated with them.
For the purpose of this video I didn’t go into the different vehicles, what a 401k is, Roth IRA, etc…. As this video is simply touching on the difference between saving and investing and introducing people to the power of compounding interest.. I also didn’t discuss how all this is impacted by Inflation, cost of living increases/decreases, etc… Which can skew these numbers a bit as well…. (btw, if you haven’t seen my How Inflation is Destroying Your Wealth Video, be sure to check it out at the link in description below this video).
So in closing, Hopefully this video has helped to shed some light on this subject for you a bit.
Let me know in the comments below too what you think and if there’s something you’d like to share that I didn’t cover, or what you might want to see us cover in a future video!
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** This is not financial advice and these are simply my own opinions, as such, this should not be treated as explicit financial, trading or otherwise investment advice. This is not explicit advice to buy these cryptos, do you own research.**
***Disclaimer: Statements on this site do not represent the views or policies of anyone other than myself. The information on this site is provided for discussion purposes only, and are not investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities.
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Thanks for watching, God Bless and have an awesome one!
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Also, be sure to check out our other articles on to cryptocurrency, bitcoin and blockchain technology below:
“Blockchain: What It Is and How It Works”; which delves into the history of blockchain, how blockchain works, how cryptocurrency uses blockchain, discusses anonymity, various types of blockchains and the different uses.
“What is Ethereum? How does Ethereum work? ETH Explored:” Dive deep into one of the largest blockchains, discover how it is different from Bitcoin and other cryptocurrency projects.
“How To Store Cryptocurrency / Safeguard Your Crypto Assets”; which discusses the most popular cryptocurrencies, how to protect your crypto, online wallets, offline storage, specialty hardware, crypto exchanges, and even gives Crypto Beadles Personally Recommendation with storing cryptocurrencies.
“Scrubbing Currency: A Comparison of Crypto to Fiat for Known Money Launderings”; This article dives into the various efforts to curb money laundering, typical money laundering with fiat currency problems faced by authorities worldwide, the rise of cryptocurrency, the differences between traditional fiat and cryptocurrencies, the history of traditional banking and it’s many failures.
I recently released a book called “The Bitcoin and Blockchain Booklet: The Beginner’s Guide to Getting Started with Cryptocurrency” on Amazon.com. You can grab it on Kindle and paperback to learn more about blockchain and cryptocurrency.