TLDR: If you’re saving money in a traditional savings or checking account, your money is losing value due to inflation. Consider putting your savings into another vehicle that will earn you a higher rate of return while you’re saving for your next investment.
If you’re at the place in your life where you’re saving even a portion of what you’re bringing in each month, you should be celebrating. Last year, a survey by Bankrate showed that 25% of people in this country had no emergency savings at all. There’s no doubt that saving is important, but what’s even more important is to understand why you’re saving. When you have clear goals for your money, you’re more likely to protect it (by not spending it) and then actually deploy it (by investing it in something that generates more money).
One of my big personal goals last year was to save about half of my income (my target number was $50K). But I didn’t want to just have $50K sitting around in the bank to stare at. I wanted to save that much because I also had a goal to invest at least that amount in real estate. I’m on a path to have the freedom to not have to work in 10 years or maybe less. That’s my ultimate financial goal. To do that, I have to build wealth over these next several years. Regardless of whether you want to reach financial independence or not, you should be focused not just on saving, but investing to build wealth. Savings alone is not going to cut it.
With that said, it’s perfectly normal that throughout the year, depending on what you invest in and how, you might need to be stacking up some cash in the bank. Keeping it there is the problem. Stashing money in a little to no interest savings or checking account is, in my opinion, the worst thing you can do to erode your wealth.
Why? Inflation. When inflation rises it means that your dollars are literally not worth as much tomorrow as they are today. And at today’s high inflation rates, that’s like taking 7% of the money in your account, putting it in a trash can, and lighting it on fire.
Before I started investing, I had $80K sitting in a savings account earning 0.01% for a year. Yup. That means I lost 2% of the value of that $80K. That may not sound like much, but over the years it adds up. So what can you do? Here are some options that I personally have used to help maintain my hard earned dollar value while I save to invest.
High Yield or Money Market Savings Account
This was my first step into trying to make my savings work harder for me. It’s the simplest of the three options I’ll share today, but it also has the lowest rate of savings. Still, putting your money in a high yield savings account at a bank is better than doing nothing at all. The average on these accounts is usually around 0.5% APY, which means if I parked my $50K in there for a year I would get $500.
Some have minimum balances or minimum amount of time you have to keep your money in the account, so be sure to read the fine print.
Nerdwallet does a good roundup of the best high yield accounts. There are also many crypto-backed high yield savings accounts coming out now, if you’re into the digital currency space. Now that I’m deploying most of my money faster into investments, I find these high yield accounts less useful. But it is a good place to start if you have a larger stash of cash sitting around or you want somewhere to put your emergency savings that is still immediately liquid but earning more than 0.01%.
Short term lending
The next level of saving with a higher return that still has some liquidity is short term lending. This can come in many forms, so I will just speak to what I have done personally and what I know others have done. When I was looking to park some extra cash that I wasn’t sure I wanted to invest yet and knew I wouldn’t need for a couple of years, I went to a company called AHP Servicing. Essentially, they buy past due loans like mortgages at a discount and then help homeowners get back on track. They do this by raising money from investors (like me) and then giving me an annual percentage return on the amount I loaned them. In this case, I get 10% annually. Not too shabby, right?
The limitations with this are that I agreed to loan out my money for 5 years. I might get it back earlier, but the expectation is set that I won’t. If you really need to pull out your money early though, you can put in a request to do so. It can take several months, depending on where the company is at with their cash reserves. What I love about this option is that you are doing good with your money while also earning a solid rate of return. There are other options similar to this like community loan funds (there is one in New Hampshire that gives you a 1-3% return) so do some research and see how you might be able to put your money to work for your local community while earning some returns.
High Cash Value Whole Life Insurance
You might be saying “What does life insurance have to do with savings?” but bear with me on this one. This is a bit more of an advanced strategy but highly beneficial in multiple ways. I discovered it as I started investing in real estate and speaking to other high net worth people way out of my league. I got so passionate about it in fact, that I decided to get licensed after I opened my own policy so I could understand all of the ins and outs and help others open their own policies.
First off, this only works well if the policy is constructed properly and is a cash value, dividend paying, whole life insurance policy with a well established mutual company. When you do this, it essentially acts like a high yield savings account that is in a life insurance company instead of the bank. The basic mechanism is that you pay for your life insurance, plus put an additional amount of savings into the policy, and that savings grows at a guaranteed minimum rate (usually between 4-5%) with the potential to earn dividends above the guaranteed minimum.
As you build up cash, you can then access that cash by taking policy loans from the insurance company using your cash value as collateral and invest it in whatever you’d like. What’s great is that because you aren’t actually withdrawing the cash, your savings continues to grow at that guaranteed rate. You can watch a video from my mentor on this topic if you want to dig in further.
While this strategy isn’t going to be for everyone, there is a lot of flexibility in how you can design policies to fit your investment strategies and personal goals. I put in an amount that I know I can comfortably save each year and then, once I have enough saved (just like I would in a normal savings account), I take policy loans to invest in passive real estate investments that provide annual cash flow and equity growth. Typically that 6-8% cash flow I get from the real estate investment goes straight back to paying the loan, which builds back up the amount that I can loan out from my policy again for the next investment. If you ever want to learn more, you can book time with me to discuss your goals and if this type of high yield savings strategy would work for you here.
Please note, I don’t make my living off of selling life insurance. I do it as a side hustle because I’m passionate about the power of this vehicle, especially for real estate investors. I encourage everyone to do their own research and find what works best for them. I’m here to help along the way if I can.
Hopefully these three options give you an idea of how you can make your money work harder for you while you’re doing the hard work of saving for your next investment. Remember, wealth is not built through savings alone. You have to invest that savings to grow it for your future financial goals. If you’re saving now, you’ve conquered half the battle. Be proud of yourself. But also do yourself a favor and turn your savings into even greater fuel for your financial growth. Your future self will thank you.
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