I’d been thinking of starting this blog for months and a lunch conversation last week finally made me pull the trigger. I was enjoying some nice tonkatsu curry with a couple of coworkers when the topic of personal finance came up. I asked where they invest their money and both of them responded “my savings account.”
What!?
If you are just starting to learn about personal finance, here is your first lesson. Saving is not investing. Let me repeat that to help it sink in. Saving is not investing. Both of these guys have savings accounts at your typical big bank that pays a whopping 0.05% annual interest. That is not a typo, and I did not mess up converting decimals into percentages. Their savings accounts actually pay them 50¢ per year for each $1000 they have in savings. The estimated inflation rate for 2018 is currently 1.9%. That means they are actually losing $18.50 worth of purchasing power every year for the privilege of loaning their bank $1000. Even if they were using a high interest online savings account like Ally, which, coincidentally, has an interest rate that is also 1.9%, they’d only be breaking even on their savings. Those who are more finance savvy are thinking, “But at least they had setup their 401(k) accounts and were contributing to those regularly right?”
Wrong!
Neither of these individuals had even logged on to setup their accounts. As a fun exercise, I looked up how long each of them had been working so that I can share with you the size of their mistake. Our company pays a 50% match up to 2% of your annual income. So, if you contribute 4% of your annual income the company will contribute 2%. So these two individuals, we’ll call them Adam and Ben, were missing out on free money. Let’s say that they each make $100,000 per year, which is about average for the role they are in, and makes our math easier.
Adam has been with the company 18 months. If he was saving 4% of his income each year in his savings account at 0.05% annual interest, he would have $6002.13. In this same time period, my 401(k) performed at approximately 24.3%. If he had put his $6000 into his 401(k) instead, the company would have matched him with an additional $3000, and at 24.3% growth he would be sitting on $10,729.89. That is $4727.76 that Adam missed out on in the short 18 months he’s been working.
Ben’s case is more severe. He has been with the company for 41 months. Saving 4% of his income at 0.05% interest would have yielded $13,678.06. Over a 41 month period, our company’s 401(k) performed at approximately 21%, so with his $4000 each year and the company match of $2000, he would be sitting on $29,617.87. Ben has missed out on $15,939.80 of free money. This is more than he even contributed to the account.
So please, if your company has a 401(k) match program and you have not setup your account, do that right now. And tomorrow at lunch, bother all of your friends until they’ve setup their accounts as well. In future posts we will discuss what to do with the additional money that you have leftover each month, but for now it won’t hurt to throw it into that 401(k) until you’ve learned a little more.
What’s the most money you’ve missed out on by not investing? Don’t be scared to share stories from when you were young and naive in the comments below.