How much do you lose out on by saving your money in a bank?

Today’s newsletter is a pretty basic personal finance 101 lesson, but is still worth going over. You can’t just save your money in the bank, since the dollar’s value decreases over time because of inflation. But how much is saving investing really costing you? I put together a quick little table in excel to show you.

Imagine that at the end of each year, you’re left with $5,000, which you can either store in your savings account or invest. If you save the money for 50 years, you have $5,000 * 50 = $250,000 in savings. If you invest the money each year, however, and you earn a rate of return of 7% (the average S&P growth rate), you have…

Over $2 million dollars! Just by investing the same $5,000 you would save anyway, you now have an extra $1.75 million for your retirement. That’s why you can’t just save your money in the bank. The opportunity cost is tremendous. In the modern financial system, you simply must invest.

Which, for what it’s worth, I think is terrible. I believe that this dynamic – the financialization of savings – makes our economy weaker and the poor poorer. I wish that you were able to just save your money and be able to comfortably retire. But you can’t (at least in USD), because the dollar just doesn’t hold its value over time. So you need to play the game.

By the way – and this is probably a newsletter for another day – the same chart above is true of the taxes you pay every year. It’s why taxes have an asymmetrical downside for people. Think about what happens if you could invest the money you paid in taxes. If you pay $5,000 a year in taxes for 50 years, the government gets $250k, but you lose out on the $2 million of retirement money you would have had if you were able to invest those funds.

Before last year, meaning before remote work went mainstream, you had to live in the high-tax places if you wanted the high paying jobs. Now though, that’s not the case. I wonder how much people’s location preferences change knowing that every $5k you save in tax payments could net you an extra $2 million at retirement…