A friend of mine asks me a question yesterday and it got me thinking. You see, she has been putting money away in a savings account at the bank for years. This was her retirement plan. While most of us agree this should constitute a very conservative and safe method. After all our deposits at the bank is secured and guaranteed by FDIC or government.
This safety was even more evident by government actions all over the world rushing at the first outset of the current banking crisis by increasing the amount under insured. Our own government increased the amount from $100,000 to $250,000. That means if the banks fail at least your money is safe up to $250,000. Why do they have to do this? If people fear of losing their money deposited with the banks and rushes to withdraw it, the world economy would collapse.
Did you know that banks are only required to keep a very small amount of the total deposit on site? The rest of your money is invested. Bank takes your deposit and lends them to borrowers. They pay you a small about of interest while lending out at a higher interest rate. If everyone wants their money back as happened in the late 1920’s without the insurance by the government one by one banks would crash. And this would definitely send the world into a deep recession or depression.
So, there is no question about the safety of putting away money for retirement in a savings account especially with the governments of the world insuring its safety, right? Before you answer let’s talk about money and how we use it to exchange for what you really want.
I was once young perhaps like many of you. I remember it must have been around the time when I was nine years old and my group of friends’ favorite thing to do after school was to go to a convenient store and buy candies. Not all of us had money. One boy bought candy when he had money. When he didn’t have enough he would pocket the candy with the so called “Five Finger Discount”.
Assume further that you own the convenient store and that I told you your merchandise are safe. It is insured with highest reputable government on earth, none other than the US Treasury Department itself. They don’t do these things but it’s our assumption, so. In this case you know better. The whole thing has a leak. This is almost the same as what is going on day in and day out at your bank.
While your money sits in the vault – if you can imagine with me, everyday someone goes into the bank and steals just a little bit from you. What happens to you? Suppose further that you saved your whole life and finally at retirement you have all the money you need to pay in cash for a brand new house – with of course enough money to live on for the rest of your days. You are eager to open the impenetrable fork vault insured by the highest of government.
Only to realize that upon receiving the cash all you have left is not even enough to pay for a down payment on the house. You believe me right? Think back with me, when I was young at the store with one dollar I could buy three candy bars. If I thought to myself back then and decided to save the one dollar and safely hid it somewhere. Now, I found that once forgotten dollar with my eager but aged youth. I still would rush to the convenient store.
What horror it must have been when I find out that I can only buy one candy bar instead of three. Over time I had lost the purchasing power to buy the other two. In real life we are not shock because we are conditioned to pay more and more for the same stuff every day. Well, you get where I’m going. Money is designed to lose value due to inflation (the theft in our example). The safety assured to us by our government provides us with a false sense of security.
Original Post Date: February 22, 2009