Why Saving Money is the Wrong Retirement Tactic for Millennial Women
Inflation, retirement, and thinking different about leveraging your money
Ever since I knew what a dollar was, I was taught to save money. I remember walking into our local bank with my mom to open up my first savings account. In those days, it was all done manually. I received my passbook with my initial deposit, a hefty $10. It was official. I had now entered the world of money. I felt very grown up.
I’m not alone in this. Most women are told to save money, but for the most part, we’re not very good at it. In fact only 44% of American women ages 21 to 64 participate in any kind of retirement, according to a survey by Personal Capital.
Things get a little better when you look at Millennial women. According to the same study, 54% of Millennial women are saving money (compared to 67% of men).
Commenting on this, Cindy Hounsell, president of the Women’s Institute for a Secure Retirement, said, “(Millennials) were very much affected by the 2008 economic crisis, so they’re saving, saving, saving.”
Is more women saving a good thing?
The old advice to save money has echoed from generation to generation throughout history—and it is still being echoed today. No doubt many people are celebrating the fact that the younger generation of women are saving more money. Unfortunately, this saving is not matched by an increase in financial education (if it were, there’d be less saving!). As I wrote before, “43% of women report than no one has taught them about investing at all.”
Unfortunately, the little benefit saving money could have for women is erased by the fact that they severely lack true financial education.
Our young women (and our older ones too) would be better served responding to the lessons of the Great Recession by doing less saving and more investing—both in their financial intelligence and with their money.
Here’s a few reasons why I’m so down on the idea of saving money.
The (lack of) interest you earn on savings
Interest rates on savings throughout much of the world are extremely low, almost nonexistent in some parts. Your savings account is actually a loan to your bank. The bank takes the money from your savings account and loans it out to its customers at a much higher interest rate than they pay you. You basically finance your bank’s business for a ridiculously low rate of return on your money.
If you were going to invest your money into a new electric-car start-up company, would you accept a return of 1 percent or less for your investment? Probably not. Yet, that’s what happens when you put your money into your bank’s savings account.
Governments who fear that their countries will fall into a depression are printing money to artificially prop up the economy and give the illusion that the economy is stronger than it really is. The problem with this funny money flooding the world, however, is that it will lead to inflation—possibly even high inflation.
What does inflation mean in everyday terms? It means that your dollar buys less, i.e., your favorite brand of shoes or jeans will cost you many more dollars, euros, yen, or pesos in the future than they do today.
Why would printing money lead to inflation? Here is a simplified explanation: Let’s imagine that there is only $100 in the world. And in this world, there are only five products available. That would mean that, on average, each product would cost $20.
The world government decides to print more money, thus putting more money into the world economy. It prints an additional $900. However, that money does not go to create more products or to grow the economy. It is used to pay off debt and prop up failing banks and businesses. So nothing new is created.
Now, instead of $100 circulating in the economy, there is $1,000. Yet, there are still only five products available. Those five products are no longer valued at $20 each, but are now valued at $200 each. That is how inflation works, and that is the result of the government printing more and more money.
If inflation, especially high inflation, does occur, then it costs you much more to buy the same items you purchase today. Instead of $3 for a loaf of bread, you may be shelling out $12, for example. That dollar, euro, yen, or peso that you saved would then be worth only one-quarter of what it was previously worth.
The problem with saving money is, of course, that as it sits in savings, gaining very little to no interest, it doesn’t grow at the pace of inflation. Your money becomes worth less and less.
By investing, however, you can put your money in assets that hedge against inflation by growing in worth as inflation grows.
Should I Never Save Money?
Saving money, for me, is a short-term proposition. I save money while looking for my next investment. When the investment appears, I invest the money I’ve been saving in something that will give me a solid return on my money.
How difficult do you think it would be to find an investment that delivered a rate of return better than the 1 percent that your bank’s savings account is earning you? It’s not difficult. All it takes is a bit of financial education and a willingness to take a risk—even a small one.
Today, if you’re a woman whose primary retirement strategy has been to tuck your money away into a savings account, I encourage you to start thinking differently. By getting out of the saving money trap today, you just might save your retirement tomorrow.