If I took $100 from you and immediately gave you back $97...
... you'd probably be angry and demand the remaining $3 back. It's a deal you simply will not accept, under any circumstance.
Yet so many people happily deposit their cash in a savings account that pays essentially no interest. Zero.
Do they not understand what inflation is? Are they just lazy? Uneducated?
You'd be surprised at some of the people who do this.
In my opinion, one of the greatest conundrums of modern society. I just don't get it.
I mean, inflation has been a bit on the low side these past few years. That being said, online banks anyone? I've got most of my cash at GS Bank and am getting like 1.2% on my savings account.
Goldman Sachs bank? They have a commercial bank? I keep cash in a Capital One 360 money market at 1.1% until I'm ready to buy a property.
I feel like they should pay me for the amount of times I've mentioned their bank, but they bought it from General Electric a year ago or so. GE needed to downsize their Capital operations because the feds were about to begin treating them as an actual bank.
Well.. most people also have very little in their checking account and very little if anything at all in their savings account. Where do you suggest people in their 40's put their $1,500 of savings? The liquidity and relatively non-existent risk of holding money in your checking account may be worth the inflationary cost.
I think the same way with my parents. I dont get why they don't just invest there money in index funds and reap the benefits. I always tell them to and honestly I think it's just the liquidity of checking accounts that makes it so appealing. They're old school and don't know much about economics (psychology and engineering).
So long as we reap the benefits I guess.
You do pay for security, service, and convenience.
If you have 100 bucks in cash, you have to carry those around everywhere. Let's say that you're 50 miles from home, and forgot to bring your money. You can't pay for anything...what's your alternative? To drive back home and get the money.
Or you could pay a small fee to get the money from some ATM. Or your bank card.
And so on.
The better question is: (regarding fees) how much is too much?
I think Financial literacy as a whole should be taught in High-School to individuals becoming Young-Adults. I know some Universities in the US and Australia have trialled programs sending finance undergrads out to disadvantaged schools to teach them financial literacy skills, I think it would be a massive help for firstly the individuals in question, and secondly the greater US economy.
I once met a guy in my travels in Arkansas who had $75k buried in a hole in the ground, because he was convinced that's the most safest place for it to be.. Not joking.
"It is well enough that people of the nation do not understand our banking and monetary system, for if they did, I believe there would be a revolution before tomorrow morning." ~Henry Ford
How would financial literacy benefit the economy? We'd have less busy little worker bees spinning their wheels, never breaking out of the rat race.
Yeah, we need to have a population of retarded hoodrats blowing their income on the newest Jordans, financed with the help of a pay day loan.
It's good for GDP.
I do this for ~ $10k or so in checking and savings accounts. Far easier to pay bills, hit the ATM, etc.
As the balance grows, it gets moved to different spots (including a $10k cushion in short-term govt's in case of a cash crunch as my wife is out on maternity leave). But those "spots" are equities, investment properties, etc.
Unless something has changed, you cant pay bills through your index fund... so yea checking accounts exist.
Its called risk adverse or conservative individuals lol
Great story bro
Emerging Markets! anyone?
Most people don't really care about $3
As many have stated, most people don't have any savings.
The great recession reminded people the importance of savings to use as rainy day funds or for future investment opportunities.
The conundrum is compounded due to artificially low interest rates. Particularly now because the fed is expected to raise rates. Bonds are projected to realize shit real returns as higher interest rate fixed income options become available. Similarly, equities are all toward the high-end of their valuations which make for a relatively low risk-adjusted returns. Many people who are sitting on cash that collects little to no interest are doing so because they place more value on liquidity than placing shoddy bets on the financial markets.
An important related note: private investments (real estate, private equity, etc.) have all benefited from the low interest rate environment. Investment professionals can still find values on individual publicly-traded stocks too. However, 99% of people don't have access to these.
There are two sides to investing. The first is return. And your return on a savings account is zip right now. The second is risk. A savings account, especially for the majority of Americans who have less than FDIC insured limits in banked assets, is also zero risk.
Most Americans take on less risk than they should in planning for their future. There are plenty of Americans, however, who might want to keep five or six figure balances in checking accounts, because of the low risk.
For context, there are also plenty of folks out there who think that they equity markets are overvalued or have been burned by/don't trust stocks, don't have the knowledge/time for real estate investing or think that market has bubbled again, and who either hear nonsense radio hosts yelling 'bonds are bad' or think potentially rising interest rates means that bonds are a bad investment.
Some examples (note that I'm not suggesting that everyone in these situations should keep huge cash accounts, but there are definitely some people in these situations who should):
A parent who has one or more children in or entering college and expects to be cashing out a 529 or savings account to pay for it. The money should have been invested over the years, but if you're depleting a $150k account over the next few years and your kid needs every cent of it, why would you keep it fully invested or invested at all?
Someone past retirement age who will gets most of their lifetimes cash flow needs from social security/pension assets/annuities. If they've also got a small savings account of five or six figures, keeping it mostly in cash can be good protection for the risk averse.
Anyone who expects large cash needs within the next 2-3 years (buying a house, tuition, health care, etc). It's always good to plan for known cash needs ahead of time; staying invested until the last second can cause you to have to sell at the worst time.
And to answer your question - a lot of people don't know how inflation works. But keeping your money under the mattress doesn't earn anything either, and is a hell of a lot more dangerous. You're getting free FDIC insurance in a bank at least.
Finally most people are more loss averse than risk averse. Putting your money in a bank doesn't lose you $3 in cash, it loses you purchasing power in the future. Mentally, this is much different than a lot of people than a 30% risk of losing $10 in the stock market.
Or paying $3-5 in ATM fees to get a hundo out. I've seen it numerous times, amazed at folks either being ok with, or not realizing they were, paying 3-5% fee to access their own money.
lol ya'll are dorks. you go to bars and pay 300% markup on shitty drinks and try to act like financially savvy experts b/c you think people using an atm is outrageous. give me a fucking break.
They should take their money and invest it in a SEX DUNGEON instead!
Liquidity premium.
That's why I have all my money in crypto currency. It's immune to inflation.
Doesn't really sound like a diversified portfolio.
It's not immune to being worth zero in two years though, and when something like that tanks, the market can go illiquid and you're stuck watching it go down while you can't sell.
Well the three percent you mention is on an annual basis, not immediately.
You are also receiving the convenience of being able to access and use your funds anytime and anywhere.
I think it's a pretty good deal
Yes, exactly. It is as if someone took your $100 and gave you back $99.99 same day. Money is insured, protected, and liquid. For some, the peace of mind in knowing that money is available at a moment's notice is worth more than the potential returns they could receive on it.
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