Courtney and Chelsea could be making and saving the same amount of money. But just one decision on where to put that money would make one significantly wealthier than the other.
Interest rates are actually on the rise so we might actually see higher rates than 0.60% soon. BUT, even if you are lucky enough to get a 2% interest rate, it would still take 35 years to double your money!
A “high yield” savings account has is about the lowest yielding investment you can make. So when do you use one? Use it to hold your emergency fund or money that you will be spending in the next few years on something such as a down payment for a home. It really doesn’t matter if you put your money in a high yield savings account, regular savings account, or checking account since the return is so close to zero. These accounts are meant for money to be spent, not to build wealth.
And if you account for inflation which has been 3% per year on average, the math is even worse. Your money actually never grows in today’s dollars if you are earning less than 3% interest since it doesn’t keep up with inflation. But your index fund investment, after accounting for 3% inflation, would double in 10 years in today’s dollars.
You don’t build wealth by putting money in a savings account. You build wealth by investing part of every paycheck into index funds and letting time work on your side.
As always, reminding you to build wealth by following the two PFC rules: 1.) Live below your means and 2.) Invest early and often.
-Vivi & Shane