Your savings account is like a Budweiser Beer

Is your money aging like a fine wine, or like a cheap beer?

Over the past 11 years bank ‘savings’ accounts have lost 1.65% of their value every single year because of inflation.

Losing about a penny and a half on every dollar each year doesn’t seem like much, but the effects of time compound the issue greatly.

As an example: say you want to save \(\$100,000\) to buy a house in ten years. The house price in dollars will increase over the ten years due to inflation. At an average rate of 1.95%, in ten years the price of a \(\$100,000\) home will ‘inflate’ to \(\$121,357.31\).

Now, if you were to place a lump sum of money today in a ‘savings’ account to cover this home purchase, you would need to deposit \( \frac {\$121,357.31}{1+ (0.3\%)^{10}} = \$117,722.59\) today in order to buy the \(\$100,000\) home in ten years.

Contrast this with Peer Lending, which has an average platform return of 7.06%. You would need to invest \( \frac {\$121,357.31}{1+ (7.06\%)^{10}} = \$61,347.03\) to buy the \(\$100,000\) home in ten years.

The difference between the two is \(\$56,428.92\).

This means that you would need to place almost twice as much money in your ‘savings’ account (and more than the value of the home today) in order to make the same home purchase in ten years.

The money in a savings account ages like beer – it is useful today, but gets stale the longer you wait to spend it. Placing money in a peer lending account lets time work for you to create real value.

Which one is the real ‘savings’ account?