Saving money is responsible and prudent – everyone should do it! But how you save matters!
When you save money, you’re storing value to use in the future. There’s many different ways to store value. The US dollars is one option, but it is a truly horrific choice.
Don’t save your hard earned value in dollars!
Any savings medium that is scarce, and difficult to produce is a much better vehicle for storing value.
Let’s look at why dollars are a poor savings technology, and what alternatives are better.
Why You Shouldn’t Save Cash
If you save dollars, they lose purchasing power over time. You’ve probably noticed that everything is a lot more expensive than it was several years ago.
Few people think from first principals about why prices rise. When you boil it down to the basics, you’ll find that goods and services DO NOT get more expensive over time.
What’s really happening is that dollars are becoming less valuable, and more dollars are required to purchase the same good or service.
Learn more about why dollars become less valuable over time
For a savings technology to be effective, it needs to store value effectively. It’s imperative that it does not lose value over time.
And ideally, it should appreciate slowly and predictably over time.
When dollars are saved in an interest bearing savings account, CD, or savings bond, the money will appreciate in nominal terms (the dollar denominated value increases).
However, even though the dollar denominated value of the account is increasing over time, those dollars typically lose value faster than the rate of interest that is being paid.
This is called Negative real yield – when the interest you earn, is less than the rate of inflation. Simply put, your savings is losing purchasing power over time.
To determine an accurate real rate of return, it’s very important to compare the interest that you are earning to a realistic rate of inflation (not the CPI).
To learn more about why the CPI not an accurate measure of inflation, check out my article about inflation and the consumer price index.
What Happens If You Save US dollars?
Almost no one uses US dollars as a long term store of value. For longer durations, it doesn’t effectively retain value.
There are (hopefully) zero financial advisors in the United States that recommend a person in their twenties save for retirement using only US dollars in a savings account.
Let’s look at an example:
A hard working twenty year old has earned an extra $1,000 that they want to save for retirement.
If this worker retires at age 65, they need to store this value for at least 45 years before spending it. They unwisely choose to store the value in US dollars, in a savings account.
Over these 45 years, inflation will happen at an unpredictable rate, making economic calculations difficult (impossible).
Takeaway #1: We don’t know how much the purchasing power of a dollar will decrease in the future.
Interest rates are manipulated by the Federal Reserve, and the US government.
Takeaway #2: We don’t know how much interest will be earned.
Although we cannot know for sure how much purchasing power will be retained, we can make some educated guesses based on history.
Side Note On Interest Rates
Over the past four decades, interest rates have predictably trended lower and lower, approaching zero.
This is not surprising considering that over this same time period, the national debt of the United States has exploded.
As a debt burden becomes larger and larger, interest rates must decrease to make it possible to service the debt.
For the past hundred years, official CPI inflation has averaged somewhere around 4%. In 2022, the national average savings account payed 0.16%.
If our worker’s savings account earns a measly 0.16% APY interest over the course of the next 45 years, despite all the benefits of compounding interest, they will have earned only $74.59 in interest (yikes).
To make matters worse, taxes have to be paid on this interest income each year. After taxes, the worker would only been able to keep $46.47 in interest earnings.
When they reach retirement age, the $1,000 they originally saved will have grown to $1,046.47. Due to inflation, the purchasing power of this money will likely have decreased to approximately $166.69 (in 2022 dollar value).
The difference between $1,046.47 and $166.96 = $879.51 or 84%. This eighty-four percent loss represents the amount of value which has been stolen via inflation.
To learn more about how inflation is theft, check out this article – the second section is titled Inflation Is Theft!
This example is a good representation is why no one should ever save in US dollars.
Real Estate as a Store-of-Value?
Real estate in the United States has been a pretty good store-of-value asset for the past several decades. It has retained its value drastically better than cash.
If you own a home, it has probably appreciated greatly in nominal terms over the past decade.
This means if you you bought a house for $200,000 ten years ago, it’s probably worth $400,000 now. Using simple math, it seems like the value of this home has doubled.
The problem with this logic is that the cost of everything has double also – so its value hasn’t necessarily appreciated in real terms.
Additionally, there are many problems with using real estate as a savings vehicle.
- It is not divisible. (You cannot easily buy $100 per month of real estate).
- It incurs real estate taxes.
- It has maintenance costs.
- It’s illiquid.
- It’s cashflow-negative if you live in it.
- It requires property management if you rent it.
All of these problems can be somewhat solved by using a bank loan to acquire the real estate, renting it out to tenants, and using a HELOC or refinance to access equity.
However, at this point, it has really become more of a complex business than a savings technology.
Saving should be simple, should not be risky, and should appreciate in real terms.
What about gold as a savings technology?
Gold as a Store-of-Value?
Gold has retained value remarkably well for the past 5,000 years.
The value of an ounce of gold has been roughly equivalent to a decent suit throughout most of history, even in ancient times.
This remains true today. Gold in 2022 costs around $1,700 per oz, and a decent hand-made custom tailored suit costs roughly the same.
Gold does retain purchasing power over time, but saving in gold has other problems.
The United States Dollar at its inception, was worth 24.75grains of gold. Dollars were backed by, and convertible to gold.
This means that at the time, you could buy an ounce of gold for $19.39.
If an American in the early 20th century saved up an extra $20, they could have purchased 1oz of gold to store value into the future. Seems like a good idea, right?
Nope.
On April 5th, 1933 all gold coin, bullion, and certificates were confiscated by the US government with President Roosevelt’s Executive Order 6102.
This demonstrates the confiscation risk of gold, which by the way, has happened in almost every single modern civilization (usually by a government during war, or by the victor after a war).
I won’t go into all the details, but a few other problems with gold as a savings technology are:
- Taxes on gains
- Cost of acquisition
- Cost of storage
- Verification
- Price manipulation with paper gold
If I had to choose between gold and dollars as a savings technology, I would definitely choose gold. But it’s not my first choice.
So what’s the solution? I’d love to tell you that bitcoin is the prefect savings technology, but it isn’t – not yet anyway!
Bitcoin as a Store-of-Value
Bitcoin has a relatively brief history (at least compared to gold). It’s been around since 2009, and during this time, it has appreciated in value exponentially.
Bitcoin has appreciated infinity percent, but only because its starting value was zero.
Some bitcoin enthusiasts will talk your ear off about how much bitcoin has appreciated from inception, and how rich you would be if you would have bought 1,000 bitcoins when they were only a few cents each.
However, this is ultimately not useful. What IS relevant, is how buying bitcoin now could benefit you.
The value of Bitcoin has reliably increased in value over time. Because bitcoin is an asset that draws the attention of not only savers, but also speculators, and traders… sometimes the exchange rate will go through wild swings upwards and down.
These erratic price swings are known as volatility. If you’re interested in learning more about why bitcoin is so volatile, check out my article: Why Is Bitcoin So Volatile?
If you look at the price of bitcoin over a long enough time period (several years or more), the volatility matters less, and you just start to notice that the price of this asset consistently trends upward.
When you have a long term outlook on your savings, you don’t have to worry so much about volatility, and you can focus on the overall trajectory.
I personally believe that bitcoin is the best long term savings technology available!
To truly appreciate why bitcoin is the ultimate savings technology, you have need to understand more about what bitcoin is, why it is special, and how it works.
To start your journey down the bitcoin rabbit hole, check out: What Is Bitcoin and How Does It Work?