Why "saving" keeps us from becoming wealthy

The savings rate has fallen to almost zero and for good reason. It doesn't work.

One successful investor once said, “Nobody ever accumulated wealth just by saving.”

You build wealth by putting some of your money to work. Yes, you have to send your money out to get a job! And not just any job. You want your money to get a good job making good money. Without a good job, your money will make only enough to cover "working expenses" and inflation. The rate of inflation has been running about 3%. $1 in 1970 is worth 19 cents now.

Where can your money find a good job?

Bank: A bank is where most money works. It earns less than the expense of sending it to work and the cost of inflation which eats 3% to 4% a year. If your money earns 3% and it pays up to 0.8% in income tax, your money earns 2.2%. Inflation of 3% takes everything. You are paying others to employ your money, like sending it to prison!

Real estate rentals: There are many systems that claim they will make you rich as Trump. However, the hard part is finding and maintaining property for a profit. Tenants must be managed. Historically, real estate has returned about 5% over time. It is hard work. It is easier to invest in a real estate investment trust (REIT) and let professionals do it for you with less risk.

Bonds: You loan your money to other people and they pay you back. If your money earns 7%, you have to pay up to 2% in income tax so your money earns 5%. However, inflation of 3% takes away money’s buying power, so you are left with 2%. Tax on the real return of 4% is over 50% of the income. You pay half in tax. Not a very good job.

Stocks: You buy part ownership of many companies. If one does poorly one year, others do well. Your money earns dividends of from 2% to 4% and it also gets a bonus if the companies do well. If you keep expenses low (don’t switch from company to company) your money earns 10% on average. It pays income tax of up to 2% on the dividends and less than 0.5% on the bonus (capital gains). Inflation of 3% leaves your money earning 4.5%. However, this job is not a government job so you might make more or less some years. Over time this job pays the best. Not everyone understands that so this job requires patience like running a business—some quit the job when times are tough.

Over time, your money can make you wealthy. Investing 10% of your family income in a stock mutual fund may earn 10% on average for 10, 20 and 30 years. Investing can allow you to accomplish your financial goals. The miracle of compounding turns your $250 a month each into $1.1 million in 30 years. Check it yourself. You paid $180,000 for that $ 1.1 million. http://www.moneychimp.com/calculator/compound_interest_calculator.htm

To avoid income tax now, use your employer’s 401K or pension plan or make your own with an IRA. Put part of that 10% in a regular account for a home down payment, cars, college funds, vacations—whatever your short-term goals are. Your retirement fund will be full by the time you need it in 30 or 40 years.

If you begin early, your Wealth Reserve can grow large enough to use it as your own bank and help you insure yourself. You spend less on credit and loans. Thus more of your income goes to buying assets that grow by themselves. This is real security: http://www.saferchild.org/power.htm

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