I know that losers are not always savers, but are are savers always losers?

I saw a commercial the other day, where they were trying to sell the audience on the idea of foregoing saving for retirement and instead they were pushing the idea of spending money on nice and exciting things right now, ala their cool sports car.
In the commercial, the couple who saved all their life for a wealthy retirement die in a car accident on the day they retire. The newly retired couple die after a life of delayed gratification, frugality and thrift. They spent their entire life foregoing the finer things in hopes of a lavish and comfortable retirement. They took few vacations, and when they did, they scrimped on everything. They always drove an old car, never had the latest gizmos or gadget.

The point of the commercial was to tell you to live for the now. To buy that car you always wanted, to ignore the potential risks and liabilities of the future and instead have fun now, enjoy yourself today, to never delay gratification.

The point of the commecial was to make a statement, to state that saving is for losers. That savers are losers. Are savers losers? Is saving for losers?

First, lets take a close look at the basics of saving. You open a savings account, and you start saving by placing small amounts of money into it at specific intervals. The banking institution pays you a very small amount of interest in return for parking your money at their bank. After years and years of depositing to your account, and after compounding the interest – bamm, you have a little nest egg.

But, you have a problem. The interest rate you have been getting paid all these years has been significantly below the rate of inflation. This inverse relationship between the rate of inflation and the rate of interest being paid has resulted in a significant loss os savings over the years. In fact, the more you saved, and the longer you saved the more money you lost. Right about now, you are probably yelling at these words, and saying I must be crazy. How could I be making such a statement? How could I be stating that the more you save, and the longer you save, the more money you lose? How, you ask. Well, the answer is simpler than you might think. Lets imagine that you have 10 dollars today. Lets also imagine that one dollar buys you one gallon of milk and one dozen eggs. You decide to be a good saver, and you start saving 2 dollars each month. After 20 years, you have saved $657 dollars after a theoritical 3% interest rate. In 20 years ago buying power, you currently have enough money to buy about 325 gallons of milk or cartons of eggs. But, herein lies the problem, inflation has had a huge impact on the cost of food, and now a gallon of milk or a carton of eggs now costs 3 dollars. So, you can only buy approximately 108 gallons of milk or cartons of eggs.

Furthermore, you also paid taxes on the interest you were paid by the bank, thus decreasing your true savings rate, since in order to keep that full interest in the bank, you had to pay the taxes on the interest with real money.
Added to that, just to save the initial $2 – you had to make $2.40
Now, I know what you are asking right now… why would we care about details like that?
That is what brings me to the underlying point that I am trying to make here. Real estate.

Let me paint you a picture. You spend 30% of the asset to purchase the entire asset. Thus, giving you a better than 3 to 1 leverage on your cash. From here, we move to taxes. Investment real estate allows you to write off phantom loss. What this means in simple terms is, if your property is worth $390,000 – you can write off $10,000 per year via depreciation. What does this meant to you? It means that you can make $10,000 per year completely tax free on a $390k property. Now, lets talk about saving. Real estate can also be a great method of saving as well. This is where leverage comes into play and is what can defeat inflation. Take for example the above example, where you are leveraged 3 to 1. If you average 3% rate of appreciation, your actual cash rate of return ends up being 9% because you dont just average 3% on your cash, but on the entire property, thus acheiving the 9%.

So, lets take two theoritical portfolios. The first is a cash savings account, the second is a real estate portfolio.
$117,000 in cash, plus an additional $250 per month placed into a savings account earning 3% after 30 years ends up over $433,000 dollars.

As opposed to the same $117,000 invested into a piece of real estate worth $390,000. In 30 years, the property is fully paid off, and its worth more than $958,000. Plus, with the $250 per month that you were socking away each month, you also have another $145,000 in cash saved that you could use to purchase another property. In addition to all this, you now own a property that nets you an income of $4,000 per month. Not to mention the fact that all these years your tax burden has been nominal. In the early years, where you made little to nothing on the property, you were able to save money on other income, and then over the years as it started to cash flow, you paid little taxes on it with the depreciation.

More to come…

Related posts:

1. Stealing from the American people Are you or someone you know experiencing tough times? Money...

Related posts brought to you by Yet Another Related Posts Plugin.