Why You Should STOP Saving Money - DO THIS NOW

What's up guys, it's Graham here. So, throughout my entire life, I've always been an excessive saver. No matter how much money I make, I always set a strict budget to follow. I calculate the bare minimum that I need, and then everything else above that is automatically saved and invested. And I'm not gonna lie, that strategy worked really, really well and allowed me so many new opportunities that never would have existed otherwise.

Until recently, today with interest rates at all-time lows, savings accounts paying next to nothing, and inflation rising faster than you could comment first, the aspect of saving money is beginning to lose its appeal. Now, with the New York Times calling it a terrible time for savers, the reality is 40% of all circulating currency was created in the last 12 months. Investors moved more money into the stock market in the last five months than in the previous 12 years combined. As a result, people are now said to be punished for saving money, which is never something I would have ever imagined I would say. But here we are.

So, we got to talk about exactly what's going on in the markets right now, why it's such a terrible time for savers, the options that you currently have available, why this woman sued McDonald's for an ad that she said was too irresistible. And then to answer the title of the video, I will address why I've stopped saving money, because it might not be for the reasons you would expect. Although, before we go into that, I got a secret message for everybody, but in order to hear it, you have to play this portion of the video back at 0.25 speed. I've never done this before, but here we go.

So, thank you so much for anyone who heard that message, and also a big thank you to Public for sponsoring this video, but more on that later.

All right, so there's a super quick background. A lot has changed throughout these last 18 months. We went from a relatively stable market, with low unemployment, savings accounts paying a respectable three percent, and bond yields paying above inflation, to being completely turned upside down. While investors sat on a record amount of cash, the money supply ballooned and interest rates declined to the lowest level they've ever been in history. That sparked a surge in demand for stocks and real estate as both investors and companies were able to take advantage of cheap rates, rising values, and a surplus of spending, getting the extra protection against inflation.

From the very beginning, the worry was that a surplus of spending and money printing would devalue the US dollar and our money would consequently be worth less as a result. And in a way, that came true. Within a year, inflation rose at the fastest pace in more than a decade; stocks and real estate hit new record highs, and across nearly every metric, things are getting more expensive, averaging 5.4% year-over-year. If you live in Georgia, unfortunately, inflation came in at a staggering 11.9%.

That poses a very real problem for savers and investors where if you keep your money cash in a bank account, you're losing value. If you invest your money, you risk short-term price fluctuations that might leave you with less than what you started with. This situation penalizes investors, and as the Chief Investment Officer of BlackRock says, this is one of those times when fundamentals have been completely disconnected from reality. Where real rates are today, that makes no sense relative to the reality in which we live.

So, when it comes to finding the best place to put your money to work and how to make sure it's not losing too much value, there's what's called the risk to reward ratio, which basically means the higher the potential return, the more risk you will generally take.

To break this down even further, we should start off with the safest savings options first. That would be cash in a savings account. Right now, some of the highest interest savings accounts out there pay you about a half a percent in interest every single year. This means if you have ten thousand dollars sitting in the account, you're going to be making a whopping 50 dollars a year.

And that's where we get into the first problem: as an investment, this is absolutely terrible. Because if you consider that inflation is 3.5% a year and you're making a half a percent a year, you're essentially losing 3% of your money every year just by keeping your money safe in a bank account. This is the main reason why it's said that savers are getting penalized, because savings accounts no longer can beat inflation.

So, that's gotta make you think: why do people even have these accounts to begin with? Well, if you plan to use this money short-term or keep it for a three to six month emergency fund, a savings account is still your best option. But if you're holding on to money that you intend to use beyond three to six months, then there are potentially better options out there.

Like, number two: a certificate of deposit, otherwise known as a CD. This is pretty much the same thing as a savings account, except you agree to lock up your money for a certain period of time, usually one to five years. In return for that, they will pay you back a slightly higher interest rate. Right now, the interest rate is about 0.7% for one year in the high end, but that brings you to the same problem as a savings account, which doesn't even earn enough to beat inflation.

So, that then brings us to bonds. This is pretty much just a fancy word for saying that you're loaning businesses, states, or the government money. In return for doing that, they will pay you back an interest rate depending on the risk and term of the loan. For example, if you want to go and buy a junk bond, that will pay you back about 4% in interest, which is just barely higher than expected inflation. But if you want to buy an incredibly safe state bond, like California, they'll pay you back 0.7% interest, which is barely higher than what you can make right now with the savings account.

Now, the benefit, though, of buying a bond is that the interest rate is locked in, meaning it's guaranteed to stay the same throughout the entire term of the loan, unlike a savings account. But on the downside, the price of the bonds could drop if interest rates go up. In the event that happens, you could wind up earning a little bit less than expected. A good example of this is through the Vanguard ETF, VIG, which pays you right now a 1.94% return on your money. Although throughout the last 20 years, the price has fluctuated by as much as 15 to 20%.

So, even though sure, you're probably gonna make a little bit more money up front, you risk a little bit more volatility in the event interest rates go up and the price of the bond goes down. But that's not the only place you could hold your cash. If you want something a bit better than a bond, you also have a total stock market index fund.

Now, on the risk to reward ratio, this one, to me, is probably the most balanced for long-term holders. That's because, over time, it should earn more than enough to beat inflation and build your wealth. While something like VT Sacks also pays you a 1.23% dividend.

Now, in terms of how much money you could make, though, since the year 2000, it's managed to average an 8.38% return plus dividends. But the problem is in the short term, you risk losing money. For example, during the 2020 COVID crash, this fund lost 33% in value in 30 days, and throughout the Great Recession, it lost 50% over two years.

So, if you know you need this money in the next few months, there's a chance it's going to be worth less in that time frame. However, once you start looking at this over a five-year period, your chances of losing money substantially decline, and the likelihood of you losing everything is pretty much non-existent in the entire history of the stock market.

So, as a place to hold your money over the next few years, this one could end up doing pretty well. The longer you stay invested, the higher the chances that you're going to beat inflation and build your wealth at the exact same time.

Although there are some potentially better places to put your money for an even higher return if you're willing to take the risk. And that brings us to number five: individual stocks. Instead of buying a broad index fund and riding the entire market, you could cherry-pick a few individual companies that you believe will do really well. If you have a knack for this, you could wind up doing a lot better than the overall market. For example, Apple is up 30% this year, Facebook is up 37%, and Tesla is up 150%.

As a store of value, the right stocks could go a long way. But of course, there is the risk that you buy into a stock like C3.ai, which went down 45% throughout the last eight months. So, with a little bit more risk, this could be a good way to grow your savings.

As far as where you can invest your money, when the sponsor of today's video, Public.com, heard that I was making this, they wanted to be a part of it and give you a little something as well. They're one of my all-time favorite investment platforms because not only do they not sell your order flow to high-frequency hedge funds like some other investment apps do, but they also incorporate an optional social aspect into the entire experience, where you can make a profile, talk with other like-minded investors, or you can follow me on there because I post some of my own stock picks and my thoughts about what's going on with the market.

They have an amazing interface that's incredibly easy to use. It's easy to navigate, and they also allow fractional investing, meaning you could buy your favorite companies for as little as a dollar without having to buy the entire stock all at once. Plus, you could easily set it up so that your dividends will be automatically reinvested for you, allowing your investment to continue to compound and grow over time without any additional work on your end.

Not to mention, best of all, as a way to show their appreciation for trying it out, Public wants to invest in you by giving you a free stock worth all the way up to a thousand dollars when you use the code "Graham" and sign up using the link down below in the description. Thank you guys so much, enjoy that free stock, and now we’ll get back to the video with number six, and that would be real estate.

Historically, this one is probably the best in terms of building wealth, beating inflation, and being able to use your savings efficiently for a multitude of reasons. The first one being leverage. Real estate offers you the opportunity to borrow money at an incredibly low interest rate that right now is below the rate of inflation, which means if done correctly, banks are essentially paying you to borrow money.

This is something I never thought I'd be able to say. Like, as a real-world example, I have a 2.4 million dollar mortgage at a 2.875% interest rate, and when inflation is 4% year-over-year, I've effectively just made $30,000 for borrowing money. In addition to that, real estate is also a pretty good hedge against inflation, meaning if inflation goes up long-term, then so do real estate values. Plus, as a source of income, rental prices are expected to continue increasing over the next few years. So, it's kind of like getting a well-paying dividend stock that you could borrow money to buy, that goes up in value over time.

Now obviously, I'm simplifying things a lot, and there is way more nuance and work involved in doing this correctly, especially in a market as expensive and competitive as what we're seeing today. But it's something to just start thinking about. Real estate could be a solid option.

But also, bonus number eight, we should probably also talk about cryptocurrency. This one is probably the most extreme in terms of the risk versus reward ratio, because in the short term, anything can happen. Even though Bitcoin has been the best performing asset of the last decade, Dogecoin went up even higher throughout the last year, and it's expected to continue growing.

We've also seen drops of 50% to 90% on a routine basis, which means you got to be prepared to either lose a lot of money or hold on for a very long time without any guarantees. Now, some people do call Bitcoin a hedge against inflation as the new digital gold, and it very well could be. But the fact is, it's too new to gather enough data to confirm this to be true. So, buy this one at your own risk and just make sure not to invest money in here that you 100% know you need.

Although, in terms of what's going on with the overall market and where I am putting my money away, here's my take on a broad scale. The biggest issue is the lack of available options for savers. With interest rates as low as they are and inflation as high as it is, savings is not exactly encouraged. That's part of the initial problem. Analysts say that because there are not that many places to safely stash your cash, investors are engaging in riskier behavior to get a higher return, thereby driving up asset prices and further widening the gap between investors and savers.

The biggest risk isn't so much young people who keep a few months' worth of cash at a time, but instead it's the people who are saving up for a purchase that's still a few years away. In the meantime, not only are they losing purchasing power, but the prices of everything else are also rising, making it even more difficult to obtain.

In terms of where things could go over the next few years, a new consumer expectation survey found that Americans believe inflation is going to be worse than expected, at 4.8% year-over-year. Over three years, the expectation is an average of 3.7%, which means if your money is earning less than that, you're losing value. The effects of this are also far-reaching, with Tyson having announced that they'll have to raise the cost of their foods. Congress is worrying that prices are growing out of control, and with the cost of labor increasing, that could begin to eat into profits, which then wind back into lower stock values.

On the flip side, though, the Fed has made it very clear that they believe the inflation we're seeing right now is just temporary, driven by year-over-year measurements from the bottom of the market, which makes it look worse than it actually is. Excess demand fueled by a reopening economy and supply chain issues that will take some time to begin running properly. Even though the general population believes that inflation is going to be worse than expected, investors are betting that inflation is not going to last and that over the next 10 years it will decline to an average of 2.8%. But that still raises the concern that your money has to make at least that just to break even.

Now, in terms of what you could do about this, it's rather simple. Just keep enough cash on hand to cover a three to six month emergency fund held in a high-interest savings account, enough to pay your day-to-day expenses in a checking account, and then the rest could be immediately invested. Unless you're saving up for something in particular, if you're saving up for something that you could buy in the next six months, then just carry on as usual and don't change a thing. If you're saving up for something that's one to three years away, then consider investing some of that in a broad index fund to balance out your risk.

Then, if you're saving up for something that's three to five years away, it's probably better you carefully invest in an index fund or a few specifically picked-out stocks and then let your investments do the heavy lifting for you. It's really as easy as that.

As far as what I am doing about everything, here's my answer. For the last 13 years, I've done my best to save as much money as I possibly could. I find any way to cut costs, live below my means, and do all of that for the sake of investing. My general strategy was to save up enough money to afford a down payment on a property so that when the right deal came up, I would be able to dump everything I had into the property, fix it up, and then live off the cash flow that property would generate.

But now, it's not so easy. Not only do current real estate prices and limited inventory make it extremely difficult to find a deal, but I've also decided to diversify into other investments, so that way I'm not 100% just in real estate with nothing to fall back on. Throughout the last 18 months, I've only held enough cash to cover my taxes, pay monthly bills, and keep a short-term fund for potential investments, and that's it. Everything else is immediately siphoned out from my account and invested in index funds, stocks, and crypto.

Now, yes, there’s certainly an amount sitting in cash where if a good opportunity presents itself, I'm ready. But beyond that, for anything else that comes up, there’s no advantage to saving any more money than I already am. It just becomes a problem of diminishing returns. Because once you have enough to get the bills paid, taxes covered, and a buffer for unexpected events, more cash statistically starts holding you back. And that's the approach that I've been taking.

Now, that’s not to say that you should not save your money or that it's time to spend your money recklessly, because that's not the point of this video at all. But it is to say that it's probably a good idea right now to have a plan in mind ahead of time and stick to it, so that you're not holding on to more cash than you need. The reality is this last year really penalized the risk-averse savers. If you kept your money in cash, you missed out on a 30% increase in the stock market, you're paying more for everything, and your money is worth less. Not worthless, worth less. It sounds kind of like the same thing.

So, a good strategy goes a long way to making sure you don't over-save and optimize the value of every dollar you have. This is a strategy that I've begun taking, because beyond a certain point, it's more important to get your money invested as soon as possible.

Or waiting for the right time to hit the like button for the YouTube algorithm if you enjoyed the video. So with that said, you guys, thank you so much for watching! I really appreciate it. As always, make sure to subscribe and hit the notification bell. Also, feel free to add me on Instagram! I post it pretty much daily. So if you want to be a part of it there, feel free to add me there as my second channel, The Graham Stephan Show. I post there every single day I’m not posting here. So, if you want to see a brand new video from me every single day, make sure to add yourself to that.

And lastly, don't forget to get that free stock down below in the description when you sign up for Public. It's worth all the way up to a thousand dollars when you use the code "Graham." You may as well do that! Enjoy! Let me know what free stock you get. Thank you so much for watching, and until next time!