Wealthy people don’t store their wealth in banks! This is why.

by admin

At first glance this might look like a controversial title. Yet the claim holds true in the sense that wealthy people don’t use banks like the average person. While the average person uses bank deposits or something similar to a personal safe to store their money. The rich don’t, and there are several reasons for this.

  • The first one is inflation. There are many definitions of inflation but the most basic one is a rise in prices. Inflation measures how much have prices risen in relation to your currency. Ex: If in 2018 you can buy 100 meals for 100$ and you have a inflation rate of 10%, in 2019 you would need 110$ to buy a 100 meals. (your money lost 10% of their value)
  • Second is opportunity cost. What is the cost in “loss of opportunity” if you choose the use a deposit with a 2% per year interest rate.

Let’s take a concrete example and a time frame . We will use 10 years as a time frame and the sum of 3000 euro which according to Eurostat is the average sum a European household saves in a year. The average inflation in Europe for the last 10 years has been 1.9% .While the average bank deposit interest has been around 1.5%

Now let’s assume it’s 2009 (10 years ago) and John has 3000 Euro’s put aside and he want’s to save them. What can he do with them and what are the costs and benefits.

Store the money in a Safe.

BenefitsRisks
• The money would be close at hand
• He would not rely on any 3rd party to hold the money
• Someone might brake in and steal all the money

Let’s see what happens in 10 years time with his money. Mainly inflation would happen, 1.9% per year would mean 19% in 10 years. In 10 years time his savings would buy him 19% less goods, 3000€ – 19% = 2430€

Put it in a Savings Account.

BenefitsRisks
• Nobody could break in and steal the money
• He would gain interest on the money
• The money would not be available as fast in case of emergency
• The bank might go bankrupt

What happens in 10 years time with his money. Inflation would happen (19% in 10 years) but since he is also getting an interest of 1.5% (1.5 x10 = 15% ). He would have lost only 4%. 3000€ – (19%+ 15%) = 2880€ *

*we should also ad to this the bank fees, account maintenance fees, withdrawal fees etc. Witch in some cases might make your balance even lower then just holding the money in a safe.

He can invest his money.

BenefitsRisks
• Nobody could break in and steal the money
• He would gain interest on the money
• The money would not be available as fast in case of emergency
• The broker might go bankrupt
• Historically long term investment has put out a profit but it’s not guaranteed to do so.

Let’s take the safest type of stock investment, using the Standard & Poor’s 500 Index  (an index of the 500 largest U.S. publicly traded companies by market value) . Why the safest? Because one company might go bankrupt, but the value of the 500 biggest companies will only go down with the hole economy .

S&P 500 is actually used as a signal for the health of the entire economy. From a safety perspective, it’s safer than any single bank in the world. So, what happens in 10 years time with his money? To know this we should look at the S&P 500 in 2009. The blue arrow is 2009 the red one is 2019

The gain was around 250%. Now the math, 3000- 19% inflation = 2430€ , 2430 x 250% = 6075€ * and just like in the case of the bank, we should also ad to this the broker’s fees.

I hope this example helps some people have a different long term perspective on money .

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