What if I told you that there was a way to grow your savings without touching your cash? Imagine you knew life hacks that benefited you financially? Picture this scenario: You just received your first paycheck, which then likely gets direct deposited into your bank in a savings or checking account. What many people don’t realize is that banks profit off of you in multiple ways when you deposit money. Here are a few ways the system is failing you and what you can do about it: Problem: You’re getting close to 0% interest from your bank annually. Solution: I’d recommend looking into online banks- some pay close to 2.0-2.5% interest annually on your deposit and also note that these banks typically don’t have a brick & mortar presence. Funds are easily transferrable from your ordinary bank (ie. Chase, TD Bank, Bank of America etc) to a bank with a purely online platform. Like many online banks, you can’t deposit cash into this account. Your best bet is to make regular transfers from the ordinary bank into this online bank on a regular basis.
The reason why this “hack” is so essential to long term savings is because of the power of compounding. For the sake of simplicity, lets say you transferred $1,000 to this online bank from your ordinary brick & mortar bank that you use in Year 1. If the online bank pays you 2% interest annually on that deposit, you’ll earn $20 over the course of the year. I know what you’re thinking, that’s peanuts. But Year 2 and every year after- the magic starts. You start to earn interest income on the $1,020 in Year 2, $1,040 in Year 3, etc. Every time that number accumulates- you earn interest ON your interest, in addition to your principal (which represents the initial $1,000 you put in), which is compounding at it’s core. Your savings start to multiply without you putting in any effort (except the fact that you have to remember to make consistent transfers over time). You probably know where i’m going with this. The goal should be to have at a very minimum- $5,000-$10,000, (if you can do more, that’s great) saved in that online bank at the time you make your first transfer. The more that you accumulate in this account- the more interest income you will receive over the long term.
To my earlier point on banking- what do you think the bank does to your money once you deposit? It doesn’t just sit there. Banks use your money to lend to others at rates sometimes five or six times the percentage of what they’re paying you in interest. Banks profit off of consumers like us every time that direct deposit hits the bank. For every dollar that gets deposited into the bank, banks have the power in something that’s called “fractional reserves” which allows them to lend to people 10x the amount of money you just deposited. In essence, it is money created out of thin air that is lent to consumers at much higher rates than what the bank is offering you in interest. The difference between what % interest consumers are required to pay once they take out a loan and the interest banks pay consumers on their deposits is the bank’s profit. Now do you agree why you have to use the system to your advantage? Theoretically, your money is still safe in the bank as the bank insures you up to $250,000. Banks are required to maintain a certain “reserve” so don’t worry- your money is secure.
We’re a nation of spenders and this makes loans big business in America in all facets of life- college, mortgages, cars, and let’s not forget.. personal loans used to pay off credit cards. Most notably, student loans have skyrocketed in this country and have reached levels that a bubble has likely formed.
Here are some of my insights if you’ve got student loans under your belt (or just some free savings advice in general):
- Pay it off as soon you can- period. Taking years and years to do this will result in you incurring more interest on that loan that you’d owe to your lender. Thousands of dollars given away in additional interest is silly and that money could’ve easily been put in an high interest yielding online banking account or in the stock market (which we’ll get into in later posts) and having it work for you instead of your lender.
- Live below your means- now is the time to struggle (a bit) to reap the rewards of tomorrow. Living below your means doesn’t mean being cheap- but being smart and shrewd about where your money is going. Those recurring memberships every month can become a curse- gym, prime etc… Cancel that gym membership if you’re only going once a week (or in some cases, none at all)- you’re not getting enough value out of it to be paying $25+ dollars a month. This amount may not seem like much but it adds up over the course of a year – so you need to start somewhere and think of alternatives if you’re not getting the most value out of your subscription. Go to your apartment gym instead! It’s likely free and you’re adding that much more to your bottom line by canceling an unnecessary subscription. Speaking of unnecessary subscriptions- PRIME. Ask yourself how much you’re really benefiting from that subscription- sure, free and fast shipping is great until you blow off hundreds and in extreme cases- thousands of dollars each year on crap you don’t always need. It’s a ploy in my opinion to get people to spend more and fuel that instant gratification that our generation desires. It’s one thing if you’re buying the essentials- i’m with you there. BUT if you’re buying things you don’t need- that’s where your subscription is getting the better of you and you’re really not getting a benefit from the free/faster shipping. You’re not saving on the free shipping there folks- businesses know this and subscriptions like these are designed for you to spend more and more because your brain tells you that you’re not paying for shipping; while you forget that you’ve blown off thousands of dollars in a year and that all the shipping costs you would’ve spent, had you not been subscribed, collectively add up to the annual fee that you pay now.
- Live at home with your parents. This is not possible for some people depending on where they work and individual situation. However, if you’re able to live at home and sacrifice a bit for 2-3 years by living below your means, you can pay off a substantial amount of debt by avoiding extra costs like rent, train (driving is a better option to avoid a costly monthly pass- unless you work in NYC or another metropolitan area. The whole goal of “living below your means” is freedom- what are you willing to give up today to take advantage of what’s in store for you tomorrow? The faster that debt is off your shoulder, the sooner you have your money working for you instead of money taking control over you.
- Negotiate. When you need to rent an apartment and are planning to live away from home, make sure that you are taking the time and not rushing into a decision. Deciding where you want to live is going to significantly depend on the type of lifestyle you’re looking for. Generally, newer residences are looking to “lease up” their properties so property managers will typically offer incentives for you to move in- i.e. free parking, X # of months of free rent, student discounts etc. Negotiating doesn’t always work when it comes to renting but be shrewd and get the most value for the buck you’re paying. Ask yourself if you really need to spend $3,000/month for an apartment with a waterfront view that buys you no equity in the long run as opposed to perhaps settling for a studio or 1 BR in a suburban area. A dollar saved is a dollar earned and those extra dollars can add up over time towards a down payment for a dream home; which is way more worthwhile than an expensive apartment-but thats just me.
5 thoughts on “The Growth Mindset”
which is better to keep the excess money in the online bank to earn secured 2% interest or to invest in this risky and highly volatile stock market to get more return on your investment
Depending on how long you see your investment horizon to be you should make the decision accordingly. If you see yourself with an investment horizon of at least another 10-20 years, I would consider an investment that follows the broader market indexes- Nasdaq, S&P etc after doing a bit of research. Also consider reinvesting dividends as this gives you an extra boost for long term capital appreciation.
10-20 years is a very long time frame that you have suggested. How can some one keep patience to see how the money will grow. And its always true that past performance is not to take into consideration that investment will necessarily show growth accordingly.
Your particular time frame will drive your risk strategy. Every investment comes with a risk- with that said, it is not worth your time trying to determine how you can make money fast in the short term- because that strategy will usually never work as you cannot time the market. The best you can do is after some research is the following: 1) Invest into a fund that follows the total stock market or a niche industry (ex: tech, financials etc) and hold it over the long term- depending on what your definition of long term is. 2) The reason I stress the word “long term” is that a well-diversified collection of securities that make up an ETF, index fund, or mutual fund, or even stocks typically has an upward trajectory when you look at a 20-30 year horizon- the market has always seen an upward trajectory with its share of bull and bear markets.
In short- you can’t determine the “what if scenarios”- you will drive yourself nuts, so i’d refrain from doing that. Since you simply want growth- holding a basket of securities in a fund, or even diversified portfolio of a few stocks with reliable and consistent dividends- you should be holding the securities and not worrying about what is going to happen tomorrow as that is out of your control. From personal experience, investment growth requires patience and is not going to happen overnight- you are undoubtedly going to see significant declines but also significant increases in investment value during market troughs and expansions, respectively.
Good Read Kunal