The difference between putting your money in an insured bank savings account and investing it in the stock market seems obvious. Money at the bank doesn’t fluctuate in value, assuming there are no fees on the account. Money in the stock market fluctuates minute by minute, and there is no guarantee you will get out what you put in.
But there is another big difference that savvy investors understand: saving large amounts of money at the bank allows the bank to take advantage of your hard-earned money. Investing in stocks allows you to earn all of the potential profits from your investment, rather than having to share them with someone else.
Put your money in the bank and it will guarantee the principal and pay you interest. Sounds like a sweet deal, but you have to realize the banks are not charities. They are profit-making enterprises. They are willing to pay you a measly interest rate because they will get to reinvest your money in loans or the ownership of investment assets and pocket most of the profit. It’s ok for you to keep some money at the bank in return for checking services, loans and credit cards, and a safe repository for emergency funds. But it is not such a good idea to keep excess cash at the bank that you don’t plan to use in the near future.
Put that money into the stock market instead and you get to own a piece of the world economy. In return for the short-term risk that your investments will decline in value during certain months or years, you get the long-term potential to earn a lot of money right along with the world’s biggest corporations. Their good fortune will be yours. As their profits rise, you will share through stock dividends and appreciation in your investment capital.
The next time you look at your bank account balances think about who is making money on your money – you or the bank? Then resolve to keep an appropriate reserve in the bank to cover living expenses, upcoming large purchases, and emergency funds. Everything over that should be considered fuel for your investment portfolio.
Richard Schroeder, CFP®
Chief Investment Officer