What's the point of savings @ 5% when inflation and CPI matches it?

Question

Seems like you never actually "make" money in value.

I put in an inflation calculator $100 from 1970 to 2000 and the value today is $432

Then I put $100 in a 5% savings from 1970 to 2000 and the value was $436.

So what's the point?

Wouldn't the safer bet just be to buy gold and sell it later as the value would fairly remain the same. Plus the gold would be acceptable internationally if the value of the dollar plummets.

Am I thinking of this wrong??

Thanks.

Answer 1

What's occurring is that you're preserving your purchasing power. If you put it in gold, it may go down in value. Example if you bought gold in the EARLY 80's by the late 90's you would've lost absolute money never mind inflation adjusted dollars.

Gold and foreign currencies are an investment/speculation that is not guaranteed a return.

Answer 2

For much of the period from 1970 to 2000 inflation was higher than today and so were interest rates. Rates are 5% now only because inflation is 2-3%. Over this time the price of gold went up and down so depending on when you bought and sold you could lose money. Gold was $600 an ounce in 1980 and only a little over $500 today. Short term bonds or CD's preserve value but offer little return. To get higher return you must put your money at risk, Looking at possible investments in the past look a lot safer than looking at the future.

Answer 3

You are almost there littler feller. You almost have this time value of money thing figured out.

First, there's a problem in your analysis period. The CPI was big in the late 70s, early 80s and so were interest rates that you could earn on a bank account, so your 5% assumption is likely low for the full period.

But, even if you did collect an average 5%, it's better than putting under the mattress and have the purchasing power shrink by 75%, isn't it?

A savings account (or similar accounts like money markets) should be used to hold funds that you'll likely need in the next five years. They're not intended to make you wealthy. They're intended to keep you liquid (able to purchase things on short notice). That way you preserve your purchasing power without taking much risk of losing it (i.e. stay liquid). Such savings accounts serve a very specific need, much like soup you buy at a restaurant. That's meant to be consumed within a day or two, not kept forever. If you want soup that can be kept forever, then you buy canned soup.

If you want to improve your chances of beating inflation and gaining real purchasing power, then you'll need to take on more risk by investing in potentially higher returning (and more volatile) investments like stocks, mutual funds, real estate and small businesses. Over longer term (5+ years), equity index mutual funds like the Vanguard 500 Index (intended to match the return of the S&P 500 index) average 8-10% - well above inflation.

Answer 4

Go look up the Dow Jones Industrial average for 1970, and see what could have happened had you put that $100 into the stock market.

Answer 5

On thing wrong with your theory... You have no savings to buy gold... Good try.. Try and think of a reason why you should save and invest money. Except buying new cars... 2029 Social Security is gona be over... What are you going to do??? I saved and invested and I got more than 5%....bunch more...

Answer 6

So the government wont arrest you