When I was little, I distinctly remember my mom telling me that there were some people in the world who were rich enough that they could live purely off the interest from their savings account and thus not have to work.
I remember being so in awe of that. I guess you could say my little brain exploded just a little bit. At the time, I thought, maybe if I were to save $1 million someday, I could get to that point too.
Well, my mom was definitely on the right path in thinking about passive income, though it would certainly take a normal everyday person a very long time to save their way to financial freedom.
In fact, the average American household brings in about $80k per year but saves just $6k per year. At today’s savings account interest rates, which top out around 4%, you would need roughly $2 million in savings to generate $80k per year in interest.
At a savings rate of $6,000 per year, that would take a whopping 333 years.
Even the best financial advisors can’t ninja their way through mutual funds, exchange traded funds, retirement accounts, or other investment vehicles to turn your $6k into $2 million in the blink of an eye.
So if you can’t save your way to financial freedom, is all hope lost? Are we all doomed to a lifetime of W-2 work, or is there another way?
Is it a mutual fund? Money market account? Stock market investments? Real estate? What’s the best way to get to that magic number so you no longer have to work?
In this article, we’ll dive into the pros and cons of saving your money, whether you should save or invest in this current environment, and how to snowball your $100k in cash into real wealth.
How Interest Rates Work When You Put Your Money In A Savings Account
When you open a savings account at a bank and deposit money, it doesn’t actually sit in a giant stack of bills inside a vault with dozens of interlocking gears like the movies would have you believe.
So where exactly does your money go, and where does the interest rate that you earn on your savings actually come from?
Interest is essentially the cost of borrowing money. When you take out a mortgage to buy a home, for example, you pay interest on that loan.
Similarly, when you earn interest on your savings, that’s because you are effectively lending your money to the bank when you deposit your money into a savings account.
The bank then takes that money and invests it – often into relatively low-risk investments like treasuries and bonds – which ideally generate returns above and beyond the interest rate the bank is paying you, and thus the bank makes their money on that spread.
Even though you may not be getting those additional returns, this isn’t necessarily a bad deal for you, because your money is both secure and liquid. More on this in a bit.
What Is APY? Comparing Interest Rates And Savings Accounts
When you’re comparing savings account interest rates from different banks, the best metric to use is APY (annual percentage yield), which takes into account not only the simple interest rate but also the rate of compounding.
Each bank sets its own APY based on a number of factors, including the current state of the economy, as well as whether the bank is currently trying to attract new deposits.
As we saw with the collapse of Silicon Valley Bank, a high influx of deposits, particularly in a rising interest rate environment, isn’t always a good thing and can lead to enormous strain for a bank.
Some banks offer an APY of as little as 0.01% (which currently includes big banks like Bank of America, Chase, and US Bank), while others – typically smaller and more independent banks – offer upwards of 1%, or even 3% or 4% in today’s market, which is a huge spread.
APY Savings Account Examples & Considerations
Let’s look at a simple example of what APY could mean for you. If you were to deposit $100,000 into an account earning 0.01% APY, it would turn into $100,010 at the end of the year – earning you a mere $10.
That same $100,000 in an account at 4% APY would turn into $104k+, depending on the rate of compounding – earning you several thousand dollars.
Of course, just as with cap rates on investment properties (where higher cap rates tend to correlate with increased risk), a higher rate doesn’t necessarily equate to the best product. And, keep in mind that interest rates can fluctuate drastically based on changes within the broader economy.
Actions To Take In Regard To Saving Right Now
Right now, a 4% APY may sound pretty good to you, especially given where interest rates have been over the last several years.
And if that APY inspires you to take a closer look at your budget, cut back, reduce unnecessary spending, and save more – fantastic. That’s exactly what the Federal Reserve has been trying to encourage you to do through the multiple interest rate hikes over the past year or so.
But, if the higher APYs are tempting you to pull back from investing (which may seem “riskier”) to saving instead (which may seem “safer”), that might actually cheat you out of substantial wealth creation over the long term. Let’s dig further into that.
Saving Your Money Vs. Investing In Real Estate
When I was growing up, I was taught that I should always save my money. “A penny saved is a penny earned,” as the old adage goes. And for a long time, I took that as Truth and aimed to save as much as I could.
As I watched the number in my bank account grow over time, I felt a sense of ease and accomplishment. I was growing my nest egg, and someday I would have enough to send my kids to college and retire.
Unfortunately, what no one taught me was that inflation was devaluing my money, even as the number was growing, and over time, the pot of money I’d worked so hard to scrimp and save became worth less.
Over time, I’ve learned to add investing to my toolbelt, as a way to combat inflation and build sustainable long-term wealth, which is especially applicable in the current economic landscape.
Reasons To Save Your Money Right Now
With all the shifts in the economy and the financial uncertainty right now, saving your money can feel like the safest option. After all, when you leave your money in a savings account, it’s earning some interest, it’s insured by the FDIC (generally up to $250k), and you can pull that money out at any time if you need it.
And certainly, if you don’t have an emergency fund (several months’ worth of expenses stocked away in case you lose your income), that’s the #1 reason you should be saving right now.
If you were to lose your job tomorrow, you want to make sure that you have enough money in savings to ride out at least several months while you look for a new job.
And even if you have an emergency fund already, given the current economic landscape, continued inflation, and talks of a looming recession, you may want to bulk up your emergency fund so you have an even stronger safety net to weather any challenges that may arise.
At the end of the day, no matter how much wealth you accumulate, there will always be a reason to keep at least a portion of your money liquid. And unless you want to keep it under your mattress, a savings account can be a great place to store your liquid capital and earn a modest amount of interest on it in the meantime.
But once you have a healthy emergency fund and reserves for any major events that may be on the horizon (your kids’ college tuition payments, planned travel, necessary home maintenance / repairs, etc.), keeping any additional funds above and beyond that in a savings account means you’re missing out on the opportunity to maximize your wealth creation.
Downsides Of Saving Your Money Right Now
Once you have your emergency fund accounted for, the rest of your capital has the potential to go to work for you, creating additional wealth, particularly in the face of the tremendous opportunities in this shifting market.
Any additional money you’re not putting to work for you is losing value day by day. The inflation rate in recent months continues to be well above 6%, which means that, even if you were able to put your money into an account with a 4% APY, your money is still losing value.
Further, because any idle money is not able to take advantage of tax benefits (e.g., cost segregation and depreciation as with real estate investing), you’re also missing out on that wealth creation opportunity.
So what should you do with any excess capital you have right now?
Rather than use that excess capital to fuel a false sense of security (and thus miss out on real wealth opportunities), let’s consider the case for investing – particularly in stable, long-term investments like real estate.
The Case For Real Estate Investing
As inflation continues to drive prices up, and interest rates encourage you to pull back and save more money, there are still certain things you must continue to spend money on – namely, basic necessities like food and shelter.
If that carton of eggs was $5.99 last year but has jumped to $7.99 this year, you can either choose to buy a lesser brand of eggs or forgo some common egg buzzwords (free-range, cage-free, organic, etc.), but most likely, you’ll still need to buy eggs.
The same goes for multifamily real estate. Even as rents across the country have risen significantly over the last several months and years, rental demand remains strong and continues to grow, meaning that even if the rent is going up, people still need a place to live and are willing to pay the higher rates.
Investing in basic necessities, particularly in a shifting economy, can be one of the best and most stable long-term avenues to grow your wealth.
Further, investing in real estate gives you significant tax benefits, thus further accelerating your wealth creation.
Of course, you should take into account your liquidity needs, investing goals, risk tolerance, desire for passive income, and your current investment portfolio as you decide whether and how to venture into real estate investing as part of your overall personal finance and investment strategy.
A Peek Into The Future:
Saving Vs. Investing
Let’s put our money where our mouth is, hypothetically speaking, and take a closer look at what all this could mean for your money and your wealth creation in the coming years.
Let’s say you had $100,000 in excess capital over and above your emergency fund and any other reserves you wanted to keep on hand.
Door #1: Save Your $100k
First, let’s take a look at what a savings account could do for your $100k. If you were to do nothing and continue to have your $100k sit in your savings account, it could grow substantially in the coming years.
Assuming an APY of 4.0%, here’s how your savings account would look at the end of the coming years*:
Year 1 – $104,000
Year 2 – $108,160
Year 3 – $112,486
Year 4 – $116,985
Year 5 – $121,665
Year 10 – $148,024
Year 20 – $219,112
*Note that this assumes that the APY would remain the same throughout the 20 years and also does not take into account the taxes you would need to pay on the interest.
Hey, not bad, right? In twenty years, your $100,000 would have more than doubled. That sounds pretty good.
But wait a second there. Not so fast.
Remember that there’s a stealth ninja that we haven’t yet taken into account here. That’s right, the inflation ninja.
Right now, inflation is high, but let’s assume that inflation levels out over time, and the average inflation over the next 20 years is a moderate 3% per year.
That would mean that the $219,112 that you end up with in 20 years, while it may seem like a lot now, would only be worth the equivalent of $121,317 in today’s money.
Suddenly, a return of $21,317 over 20 years doesn’t seem so hot anymore, does it?
P.S. Here’s an inflation calculator so you can play with the numbers yourself.
Door #2: Invest Your $100k In Real Estate
When you save your money, even though the number continues to grow every year, it’s losing value every day that you don’t put it to work.
So now, let’s take a look at that same $100k if you were to take a different action to invest it today instead of save it.
In other words, if you were to invest $100,000 today, you would end up with roughly $170,000 after 5 years, when taking into account both the cash flow distributions and the profit from the sale of the asset.
Let’s also assume, for the sake of this example, that cash flow distributions in the first couple of years of each syndication are fairly low, to be conservative. Let’s assume 2.5% for years 1-2, 5% for years 3-4, and 7% for year 5.
Year 1 – $102,500 ($100k invested in Syndication #1, plus 2.5% cash flow)
Year 2 – $105,000
Year 3 – $110,000
Year 4 – $115,000
Year 5 – $170,000 (factors in the sale of the asset)
Year 10 – $289,000 (Started with $170k invested in Syndication #2, exiting at a 1.7x equity multiple after 5 years)
Year 15 – $491,300 (Started with $289k invested in Syndication #3, exiting at a 1.7x equity multiple after 5 years)
Year 20 – $835,210 (Started with $491k invested in Syndication #4, exiting at a 1.7x equity multiple after 5 years)
You’ll notice that the numbers get off to a slower start in years 1 and 2 due to the lower cash flow assumptions we’re using in this example, but the numbers take off dramatically after that, and the final number – $835,210 – beats the final number in the savings example – $219,112 – by a whopping $616,098.
That $616k is essentially your opportunity cost. In other words, if you were to do nothing and just keep your money in a savings account during that 20 years, the $616k is the potential wealth you could have created in that time.
The reason that the number jumps so dramatically in the latter years is because you are reinvesting at a higher basis with each subsequent real estate syndication investment. This is in essence what people talk about when they talk about snowballing your money.
When factoring in the same 3% inflation rate over 20 years, that $835,210 is still worth roughly $462,436 in today’s money, meaning that you would have more than quadrupled your money in those two decades, even when accounting for inflation.
And, this doesn’t take into account the tax benefits of investing in real estate, which would juice your wealth building journey even further.
Door #3: Invest Your $100k In Real Estate, But Wait 5 Years
Let’s throw one more scenario in here, to factor in the cost of inaction. In other words, given everything going on in the economy right now, even though you might still believe in the long-term value of multifamily real estate investing, perhaps you’re thinking of sitting out for a few years, to see how things go before you jump into an investment.
Let’s take a look at what 5 years of inaction can do to your overall wealth creation over 20 years. Let’s say that this year, you put your $100k into a savings account at 4% APY, then invested into a real estate syndication at the 5-year mark.
Saving $100k at 4% APY for 5 years:
Year 1 – $104,000
Year 2 – $108,160
Year 3 – $112,486
Year 4 – $116,985
Year 5 – $121,665
At year 5, you invest in your first syndication at a 1.7x equity multiple over 5 years:
Year 5 – $121,665 invested
Year 10 – $206,830
Year 15 – $351,611
Year 20 – $597,740
After 20 years, your total capital would be at $597,740, which is nothing to sneeze at. But when compared to the $835,210 that you could have if you were to invest now instead of waiting 5 years, you can see the opportunity cost of delaying.
That’s an opportunity cost of $237,470 for waiting 5 years.
Of course, you can use this basic scenario to extrapolate out the impact of waiting for less or more time on your overall wealth.
Why Investing In Real Estate Is A MUST For Building Wealth
The bottom line from all these scenarios is that, whether you choose to invest right now or down the road, investing in real estate is crucial to your overall wealth creation. The longer that your money sits in a savings account, the more value it’s losing.
Over time, the opportunity cost could be staggering and could have severe consequences for your overall wealth potential – not just for you but for your family and future generations as well.
So whatever you do, do something. Take action to educate yourself so you can find the right real estate investments for your goals.
Even if you’re not yet ready to take the plunge to invest in real estate syndications, do your research to figure out your lane and what you’re most comfortable and interested in as far as investing goes. Here are some ideas to get you started:
Money market accounts
Real estate investment trusts
Exchange traded funds
Each of these has its own pros and cons, as well as things you should take into consideration, like risk tolerance and capital gains tax, so do your own due diligence.
The point is to take action on something. If that means making an appointment to talk to a financial advisor, joining our Goodegg Investor Club to learn more about real estate, asking friends and family about their experience with financial advisors, mutual funds, retirement accounts, and more, or even trying a stock market simulation game,
While everyone else is running scared and frozen with inaction, now if your opportunity to jump in, take advantage of some of the best investment opportunities out there, and geometrically grow your wealth.
Here at Goodegg Investments, we have a variety of options for you to help you learn about and invest in real estate – a great hedge against inflation and rising interest rates.
Through real estate syndications, you can diversify your portfolio and take advantage of the cash flow, equity, appreciation, and tax benefits.
Click here to get started, or check out the helpful resources below.
If you’re accredited and ready to invest right now, we invite you to check out our open deals page to learn more about our current or upcoming opportunities.
If you’re not yet ready to invest but are curious about how all of this works, we invite you to dip your toe in the water with us through our free 7-day email course – Passive Real Estate Investing 101 – or to get a free hardcover copy of our book – Investing For Good.
To learn more about us and our experience, be sure to download a copy of our track record, which shows the projected and actual returns we’ve achieved across all the deals we’ve exited to date.