A Look at Long-Term Returns on Cash Savings
By BRETT ARENDS
WSJ
Is cash really safe?
Everybody knows the risks of keeping too much money in the stock market. And if inflation rears its head again they may rediscover the risks of keeping too much money in bonds, as well. But what about cash vehicles–savings accounts, money market accounts and certificates of deposits? At least they're safe, right?
Not so fast. These may be secure from "volatility," and they may even be safe from risk of default–especially where they are backed by federal deposit insurance. But cash comes with its own drawbacks, which don't get enough coverage.
Inflation and taxes aren't exciting topics. They rarely make much news. But over time they take their toll. This matters. American households hold about $7.7 trillion in deposits like savings accounts, CDs and money market accounts, according to the Federal Reserve. That's more than the $4.8 trillion they hold in equity mutual funds or $2.2 trillion in bond funds, according to the Investment Company Institute.
Interest rates are very low at the moment. But that may be temporary. What's the longer-term story? To find out, I analyzed data compiled over 45 years by the Federal Reserve and Labor Department. Since 1964, money held in short-term savings accounts, such as one-month CDs, has earned average annual interest of about 6.15%. Someone who put $100 in a typical account back then and just left it there, rolling over the interest, would have about $1,600 today. Such are the joys of compound interest. Alas, over the same period the Consumer Price Index has risen from 31 to 218–or, to put it another way, a dollar has lost about 86% of its purchasing power. So in real terms that $100 has really only grown to about $220 in constant, purchasing-power terms.
And that's not all. Savers are taxed on interest. And they are taxed on nominal interest, not the real, after-inflation interest. So if you earn 6% on your money in a year, but consumer prices also rise 6% during that time, you may feel–understandably–that you have just been running in place. But as far as Uncle Sam is concerned, you have just made 6%.
(More here.)
WSJ
Is cash really safe?
Everybody knows the risks of keeping too much money in the stock market. And if inflation rears its head again they may rediscover the risks of keeping too much money in bonds, as well. But what about cash vehicles–savings accounts, money market accounts and certificates of deposits? At least they're safe, right?
Not so fast. These may be secure from "volatility," and they may even be safe from risk of default–especially where they are backed by federal deposit insurance. But cash comes with its own drawbacks, which don't get enough coverage.
Inflation and taxes aren't exciting topics. They rarely make much news. But over time they take their toll. This matters. American households hold about $7.7 trillion in deposits like savings accounts, CDs and money market accounts, according to the Federal Reserve. That's more than the $4.8 trillion they hold in equity mutual funds or $2.2 trillion in bond funds, according to the Investment Company Institute.
Interest rates are very low at the moment. But that may be temporary. What's the longer-term story? To find out, I analyzed data compiled over 45 years by the Federal Reserve and Labor Department. Since 1964, money held in short-term savings accounts, such as one-month CDs, has earned average annual interest of about 6.15%. Someone who put $100 in a typical account back then and just left it there, rolling over the interest, would have about $1,600 today. Such are the joys of compound interest. Alas, over the same period the Consumer Price Index has risen from 31 to 218–or, to put it another way, a dollar has lost about 86% of its purchasing power. So in real terms that $100 has really only grown to about $220 in constant, purchasing-power terms.
And that's not all. Savers are taxed on interest. And they are taxed on nominal interest, not the real, after-inflation interest. So if you earn 6% on your money in a year, but consumer prices also rise 6% during that time, you may feel–understandably–that you have just been running in place. But as far as Uncle Sam is concerned, you have just made 6%.
(More here.)
Powered by Blogger
0 Comments:
Post a Comment
<< Home