We see it all the time. Young clients in their 20s and 30s choose to have their entire paycheck direct deposited into one account, their bank account. Whether it’s with Chase, Bank of America, or any of the other banking institutions out there, this is not a very good strategy. Based on current rates, at best, you are probably earning around 0.03% a year….0.03%!!!!!! Why is this so dangerous you may ask...
PROBLEM - INFLATION
You’ve heard of it but do you REALLY know what it is? Let’s take a gallon of milk...In 1999, it cost $1.30, today it costs $2.56. The product itself hasn't changed at all. The same thing goes with all other goods and services you consume - their prices increase with time. A box of Cherrios was $3.89, now it’s $5.15. Everything from pizza, to movie tickets, to manicures, to airline tickets goes up over time. What does this do to the value of your dollar? It erodes it. It’s worth a lot less so you end up having to use a lot more of them to get what you want.
What about salaries? Doesn’t minimum wage go up with inflation to offset this price disparity?
HAHAHAHAHA. No but seriously, sadly, it does not. In fact, the opposite is usually the case where the increased cost of labor to businesses is in turn reflected by an increase in the cost of the goods they sell, therefore passing the higher labor costs right back on to the consumer. But that’s another topic for another day.
So now, back to your checking/savings account, does it adjust for inflation? Not likely. So let’s say you have $10,000 in that account. You’re feeling great cause 10 years from now that $10,000 will still buy you $10,000 worth of stuff. So you haven’t lost anything, or have you?... Based on the historical rate of inflation at 3% a year, ten years from now, $10,000 will actually seem like it’s only $7,441. You’ve actually lost the purchasing power of about $2,500. Because everything costs more, you can buy a lot less. It’s almost like you’re paying for your money to sit there!
SOLUTION - STOP PUTTING YOUR ENTIRE PAYCHECK IN THE BANK
(Or in a piggy bank or under a mattress...you get the point)
So what should you do? There are a couple ideas we suggest to our clients. What if you had your paycheck divided. Sending the part you need to pay bills every month to your low-interest bearing checking account where you have your bill pay set up. But the rest of the money went into, at the very least, a money market account. Hypothetically, if you were making a 1% return from the money market account, that alone just provided a 97% increased return.
Working with a money pro opens up a world of possibilities. You know how they say “what you don’t know can’t hurt you”? That doesn’t work in the world of money. Not knowing your options can be detrimental to accumulating and growing your wealth. The more you know, the more informed your decisions will be. A pro can help you determine how much you need to keep in cash to fund your day to day life and then provide you with short and long term strategies to help you get the things you want. You don’t have to do it alone. If you’d like to have a financial go-to person in your corner all you have to do is ask.