I’m a Financial Expert: 4 Things You Don’t Know About Your Money
Written by
Laura Beck
Edited by
Chris Cluff
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You might think you’ve got a handle on your finances, but there’s probably a thing or two you don’t understand.
GOBankingRates spoke with financial experts to uncover some surprising truths about money that many people overlook. Carlos Rodriguez, director of financial planning at Edelman Financial Engines, pointed to EFE’s 2023 Everyday Wealth in America report, which indicated that 46% of Americans cite personal finances as their top source of stress. That emphasizes the importance of effective financial management for overall well-being.
From investment strategies to the power of small savings, these insights could change the way you think about your hard-earned cash.
Here are four things you (probably) don’t know about your money.
Being Too Conservative Can Cost You Big Time
If you’re the type to keep your money tucked safely away in a savings account, you might want to reconsider.
Robert R. Johnson, Ph.D., CFA, professor of finance at Creighton University’s Heider College of Business, has some eye-opening data to share.
“Being conservative with investments over time is extremely costly,” he said. “From 1926 through 2023, government bonds earned an average return of 5.1%. One dollar invested in government bonds at the beginning of 1926 would have grown to $133 by the end of 2023.”
Sounds pretty good, right? Well, hold onto your hats. Johnson continued, “Over that same time period, large stocks (think S&P 500) earned 10.1% compounded annually. That same dollar invested in an index of large cap stocks would have grown to $14,568 by the end of 2023.”
That’s not a typo, folks. We’re talking about a difference of over $14,000 from a single dollar. As Johnson put it, “A 5% annual difference in returns results in an astronomical difference in terminal wealth.”
You Can’t Save Your Way to Wealth – You Need To Invest
If you think squirreling away money in a savings account is your ticket to wealth, think again. Johnson busts this common myth wide open.
“One of the biggest money myths is that you can save your way to wealth,” he said. “The wealthy save and invest. The middle class, too often, simply save. Unfortunately, it isn’t enough that people simply save. That is a necessary condition for building wealth, but not a sufficient condition for wealth accumulation.”
Instead, it’s all about investing. “Individuals need to be taught to invest for retirement and not to save for retirement,” Johnson said. “The surest way to build true long-term wealth and higher net worth is to invest in the stock market.”
Of course, as with all wealth building, the earlier the better. Why? Well, the glory of compound interest — which is interest calculated on both the initial principal and all of the earlier accumulated interest.
Small, Consistent Investments Can Add Up to Big Money
Think you need a fortune to start investing? Grace Moser, owner of the women’s lifestyle blog Chasing Foxes, disagrees.
“The thing I wish people knew about their money is if you set it and forget it, it will grow,” she said. “I think people believe that they need to have a huge amount of money to start investing, but it’s just not true.”
Moser shared a personal example that might just blow your mind. “Back in 2016, my husband and I opened up an Acorns account and had it hooked up to our credit card. So every time we made a purchase with that card, it would round it up to the nearest dollar and put it into the investment account we had with them,” she explained.
The result? “Then in 2022, we checked it after we had basically just remembered we had the account and realized that there was over $5,000 just sitting there,” Moser said.
That’s right: $5,000 from spare change. As Moser put it, “And while six years to get to that amount might sound like a lot, it really didn’t cost us any stress or frustration just to set up the account and have it build. That was $5,000 we wouldn’t have had if we never decided to do it.”
To help with this, you might want to automate your investments.
“Automatic savings can help curb bad spending habits and build your savings without requiring much additional action,” Rodriguez said. “Automatic savings plans – like 401(k)s – take the effort out of saving by automatically setting aside a portion of each paycheck.”
Your Money Loses Value If You Don’t Put It To Work
Here’s a sobering thought: That cash you’re holding onto is probably worth less than you think. Aaron Cirksena, founder and CEO at MDRN Capital, dropped this truth bomb: “It loses value if you just let it sit there and you don’t take action in growing it — i.e investing. Inflation reduces the power of money.”
But it’s not all doom and gloom. Cirksena pointed out an opportunity many people miss: “Many people don’t understand the tax benefits of their money either. There are ways your money can grow tax free.”
So there you have it, folks. Four things about your money that might just change the way you think about your finances. From the power of investing over saving to the surprising growth potential of spare change, these insights could be the key to unlocking your financial future.
Remember, as Johnson said, “Albert Einstein is rumored to have said that ‘compound interest is the greatest mathematical discovery of all time.’ Whether he said it or not is irrelevant, but time is the greatest ally of the investor because of the ‘magic’ of compound interest.”
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