Inflation: All Kinds of Bad News for People With Money in Bank Accounts
Most people decide to teach English in South Korea for the same few reasons:
- To have a year or two of fun and adventure before moving back to go to grad school, or get a “real job.”
- To pay off student loans quickly. The salary, when combined with free housing, and reasonable cost of living means you can make serious inroads. Many teachers manage to pay off $10,000 USD + per year.
- To save a serious chunk of cash, either for a house, or to invest in something like the stock market. Private teaching, combined with frugal living make it possible to walk away with $50,000-100,000 after a few years.
Let’s Talk Serious Chunk of Cash
Let’s talk about option three-the serious chunks of cash. If you’ve paid off your student loans and other debt, what are you going to do with all that money you make in Korea? There are a million and one options. However, here’s one thing you most certainly shouldn’t do: park it in a bank account.
Sure, it seems “safe,” but in actuality, it’s not. You’re losing money because of inflation. The value of your money is going down as governments print more of it, but the cost of living (inflation) is going up. The result is that in 10 years from now, that sweet pool of money you once had might not be so awesome. Let’s talk more about this inflation thing.
I’m Scared of the Stock Market!
Something that I hear from my friends and family members all the time is that they’re scared of the stock market. The reason it that they perceive it as too risky for them to put their hard-earned money into. They think that if they invest in stocks, the market is bound to go down and they’ll lose money. They wonder why they can’t keep their money in something like a government bond, GIC (guaranteed investment certificate) or high-interest savings account. The short answer is: inflation, which I find far scarier than investing in the markets.
Official Definition of Inflation
Here’s an official definition of inflation from Investopedia:
“A sustained increase in the general level of prices for goods and services. It is measured as an annual percentage increase. As inflation rises, every dollar you own buys a smaller percentage of a good or service.”
Usually Around 2-3% per Year
Inflation in any country varies from year to year, but it’s quite normal for it to be around two to three percent. These days, interest rates are at historically low rates. As you might have noticed, you basically get nothing keeping your money in a regular bank account.
If inflation that year is two percent, you are in effect losing two percent on whatever money you have parked in a bank account. It is certainly not as “safe” as it appears to be since you are consistently losing money year after year, after year. This remains true as long as interest rates remain low and inflation rates are average or high.
Can you Beat Inflation Keeping your Money in the Bank? Probably Not
Of course, you could get a slightly higher interest rate if you lock your money in for a certain period of time like in a GIC or bond. The way it works is that the greater the time you commit the money, the higher the interest rate. These days though, it is still pretty tough to beat inflation. This is true even when locking your money in for terms as long as five or ten years.
Interest Rates are Rising: Danger for You
You also have an additional danger if you lock your money in for such a long period–interest rates are sure to rise in the next few years because they have nowhere to go but up and if you try to withdraw your money earlier, you will face all sorts of penalties. Do you really want to be holding onto something like a ten year GIC with a two percent interest rate when five years from now, the rates for high interest bank accounts have gone up to four percent? It is a pretty terrible situation to find yourself in.
Is the Stock Market Safe?
Let’s go back to the original question of whether the stock market is “safe,” or not. It is not. You can lose money. However, you are not any “safer” when you put your money into some sort of low-interest earning account due to inflation. This is a guaranteed loss for you. In the short-term, the stock market may go down but over the long-haul it is almost a guaranteed winner.
What Andrew Hallam Has to Say About This
According to Andrew Hallam, from 1926 to 2013, the US stock market averaged a total annual return of 9.92%. Total annual return is the increase in stock price + dividend payments per year, reported as a percentage.
For example, if you had $100,000 invested in the stock market and your return for the previous year was 9.92%, your portfolio would be worth $109,920. Nobody can predict the future, but if the past is any indication, if you hold stocks for a long period of time (10+ years) it is pretty hard to lose. Check out this article from Time Magazine “How You Slowly Lose Money with Bank Accounts,” for more details.
If Interest Rates Rise…
I should add a short warning note about GICs. If you are reading this article far into the future, or there is some sort of crazy maneuvering by the powers that be (mainly the US central bank) and interest rates are reasonably high (perhaps five or six percent for a ten year GIC), I would consider moving a good portion of my portfolio into something like this. For the next few years it seems very unlikely to happen. For this reason, waiting and wishing for high interest rates on GICs is probably not the best strategy for any of us.
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