- So my goal in this
video is to convince you, in the next five minutes, why the bank is a terrible
place for your money, and I'm also going to provide you guys with a much better option
than just putting your money into the bank and letting it sit there. So, this is a concept that is nothing new. A lot of people have known
this for a very long time, that, thanks to something
called inflation, leaving your money sitting in the bank is actually a terrible option when it comes to preserving
the purchasing power of your money. And mainly what I wanna do
here is explain this concept in case this is something you
have never learned before. So if you are learning
this for the first time, please drop me a comment down below just so I'm aware of how many people never heard of this concept before. Or understood that you're
losing the buying power of your money thanks to inflation. Now, real quick, before
I get into the video, I wanna give a quick
shout out to Jeff Rose because he inspired this video. He posted a video talking about why banks are a terrible
place for your money, and he gave a couple of
other interesting ideas of where to put your money instead of putting it into a bank account. So I'm gonna link that video up down in the description below because it absolutely inspired this one, so thanks for putting that video out Jeff, awesome video there. Okay, so the first thing
I want to talk about here is a survey that GOBankingRates conducted back in 2016, looking at
what percentage of Americans actually had money in
their savings account, and how much they actually had saved up. And what they found is that
34% of Americans have $0, absolutely nothing in
their savings account, and 35% have less than $1,000. So this is primarily focused towards those who have $1,000 or more sitting
in your savings account. But even if you have less than that there are still better options
than leaving your money sitting there in a checking
account, or a savings account, and I'm gonna show you
guys exactly what that is at the end of this video. Let's go ahead and take a step back here and go over some basic
personal finance lessons by defining a couple
of terms for you guys. First of all, what is a savings account? A savings account is simply
a place to put your money that you are saving, and this is money that is completely liquid, you have very easy access to this money. And then the other one that
goes hand in hand with this is your checking account. And the only difference
between these two accounts, typically, is the ability
to have a debit card and do withdrawals and deposits
from your checking account, where you're not going
to have a debit card with your savings account. And that is primarily
what these two things are supposed to be used for. The savings account is used to hold onto your extra money that you
need to keep in liquid form, and the checking account
is used to pay bills. But, what we are finding is that people are keeping way too much money in one of these two
accounts and, as a result, they are losing the
buying power of that money because interest rates are
extremely low on these accounts and inflation is significantly higher. And just to cover those
two terms for you guys, inflation is basically the deterioration of the buying power of your money. Basically, the best is example is it was a lot cheaper to
buy bread in the 1920s than it is to buy bread
today because of inflation. Prices have increased and the buying power of each dollar has decreased. And then your interest rate is simply the amount of money due based
on a deposited sum of money. So when you put money into the bank, into a checking account
or a savings account, or some kind of certificate of deposit, they are going to give
you a certain percentage of that money back every single year. Now, before you guys get
too excited about that, I'm about to shatter that and show you why that's actually terrible. They're really not giving
you, pretty much, anything. So, according to Bankrate,
the average yield for a checking account here
in the United States is 0.06%, and I will tell you this, I did a video on this
topic about a year ago and it was 0.05%, so
we've improved by 0.01%, so we can all celebrate about that. But, obviously guys,
that is a terrible yield for the checking accounts. And we understand that
inflation typically sits around 2% per year. But what exactly does that mean for those with a high balance in
their checking account or their savings account? If you have $10,000 sitting
in a checking account for one year, you are going to earn $6 in interest from your bank. You're gonna, basically,
earn enough to buy, I don't know, a couple
of Starbucks coffee. But you actually didn't
earn any money at all thanks to inflation. In fact, you lost $200
dollars of buying power, even though you earned
that $6 of interest. So your actual loss
over that year is $194. So, even though you earned $6 in interest, your buying power deteriorated by $200, resulting in a loss of 194. And there are plenty of people out there with $10,000 or more sitting
in a checking account or a savings account. Or, possibly, some kind
of certificate of deposit with a yield that is lower
than the rate of inflation. Now, it's even more drastic, or severe, when you look at people
with an even higher balance in their checking or savings account. So, take somebody with a $100,000 balance. If you give the bank $100,000, and they hold onto it for one year, they're gonna give you
$60 worth of interest, which is, again, nothing. That's gonna pay for a
dinner at that point in time. But what most people
don't understand is that, thanks to inflation, you lost
$2,000 worth of buying power on that $100,000, meaning
your actual loss here was $1,940 over the course of one year by leaving $100,000 in the bank. And if that's not scaring you
guys, I don't know what will, because if you're losing about $2,000, without even knowing it, then that's a pretty scary fact here. And my best comparison,
that I've heard of before, for inflation, is that
inflation is like termites. Day by day, you don't
really notice the affects, but over the course of ten, 20, 30 years, the entire house can come crumbling down, and people can get wiped out by inflation by holding onto cash. And that is why people
who save cash in the bank lose money every single year. And the best rule of thumb to follow is, if interest rates for bank
accounts stay around 0.06%, for every $100 you have in the bank, you're gonna lose $1.94 to
inflation every single year. So, what are we gonna do about that? I have a solution I wanna
share with you guys. And that solution to this problem here of keeping up with inflation and protecting the buying
power of your money, comes to us in the form
of short-term bonds. Now, if you guys are anything
like most people I talk to, you have no idea what a bond is. Maybe you have a couple of them sitting in your parents safety
deposit box under their bed, but other than that you
have no idea what these are. So, I wanna give you guys a
really quick finance lesson here so you understand what exactly these are, and how short-term bonds differ from your checking account
or your savings account. So, a bond is, very simply
put, a debt obligation. It's an agreement to pay back dept over a certain period of time. And, basically, the issuer of this bond is agreeing to pay you
back at a fixed rate, or it could be a variable rate, over a certain period of time. Now, as far as bonds, a
lot of people on my channel learn about stocks and the stock market, and bonds are a more conservative
investment than that. Don't really get as much coverage, they're just kind of boring,
at the end of the day, but think about a stock as equity, owning a piece of a business. Whereas, if you are a
bond holder for a company, you are basically like the banker, you are just holding onto debt. So, people who invest in stocks get to capitalize on
the growth of a company, but bond holders are only
going to be paid back whatever the agreed upon yield is. They're not gonna capitalize on the growth of that actual company. So that's the difference there between stock holders and bond holders. Now, when it comes to bonds,
there are three primary types. Number one, we have municipal bonds. This would be bonds to local governments or local villages, or cities. Let's say for example,
your village or your city had to replace a road and
they didn't necessarily have the money for it,
they might take out a bond that you would be able to purchase as a municipal bond holder. Number two, we have corporate bonds. That is when companies are,
basically, issuing debt and investors purchase
that debt through a bond, because they wanna earn that fixed yield over that certain period of time. And then number three, we have the one that most people are familiar with, that is US Treasury bonds. This is, essentially, giving
a loan to the US Government to fund ongoing operations, or to put it towards our
massive debt shortfall. But US Treasury bonds are
considered to be the safest, highest quality bonds with
the lowest risk of default. And what I mean by defaulting is to not be able to pay back that person, and to basically fall
short of your obligation to pay that debt back. And, as far as corporate bonds go, these are rated by Moody's
and Standard & Poor's, based on the credit
worthiness of that borrower. And higher quality bonds are going to command a lower interest rate. Lower quality bonds are going to command a higher interest rate, because of that risk, reward profile. But that's getting pretty
nitty gritty here, guys, you don't necessarily
have to know all of that to understand what we're
talking about here. Now, what I wanna talk to
you guys about, specifically, is a very easy to implement
solution to this problem of losing the buying power of your money, thanks to a new feature of
Betterment called Smart Saver. Now, just for the sake
of transparency, guys, I am affiliated with Betterment, but the reason why I am
sharing this with you guys is because I believe in this product, not because of any kind of
benefit for you guys using it. I do provide an affiliate link if you guys want to sign up
for Betterment under my link, but, by no means, do you have to do that. Smart Saver is, essentially,
offering you a way to invest in these bonds
and earn a rate of interest that exceeds the rate of inflation in a very low-risk manner, that gives you easy access to your money. So, instead of leaving your money in a checking account
or a savings account, Betterment takes that money and invests it in a portfolio of very low-risk bonds. And, based on today's interest rates, their anticipated yield from this account, after fees, is 2.09%. Meaning that, since
inflation sits around 2%, you are fully protecting the
buying power of your money by using Smart Saver, and you're not losing that
money by leaving it in the bank. And what Betterment has developed here is a very easy way for
you to also get access to that money when you need it. So, let me walk you guys
through the whole process, then we're gonna talk
about what Betterment is actually doing with your
money through its Smart Saver. Number one, this is obviously a feature reserved only for those who
have an account with Betterment. If you guys don't have
one, I provided a link in the description below,
if you wish to use it. And I have also provided a link as well to Smart Saver if you
guys are just looking to do some more research on
this option provided to you. But the very first step is
opening an a Betterment account. Number two, that is when you
can enable cash analysis. And what that does is
Betterment is going to link up to your checking account
and your savings account to start to get an idea
of your spending habits, and how much money
you're spending a month. What are your regular
reoccurring monthly expenses? And once they understand these figures, they're able to understand how much money you should realistically
have in your checking and savings account at
any given point in time. And then they enable a feature called the two-way cash sweep. I know that sounds confusing, but it's actually not confusing at all. When you have extra money
in your bank accounts, based on them doing
analysis of your spending, that money gets swept over
to your Smart Saver account and it's invested in these
low-risk, short-term bonds. That way it's protecting the
buying power of that money. And then, when your account
balance gets too low, they sweep that money back
into your bank accounts. That way you have money
available to pay your bills and if you are not a fan of
that whole automated process, you can do this exact process yourself by monitoring the
balances of your accounts. But if you're somebody like
me, and you're very forgetful, this is a great option to have
where they can, basically, automate this whole process for you, and help you protect the
buying power of your money. So once your money is in Smart Saver, what is Betterment doing with that money? Well, they're taking 80% of that money and they're putting it into a bond fund of US short-term Treasury bonds. And that exact fund is SHV if
you guys wanna check it out. I'll also link it up in
the description below. And this is a short-term
Treasury bond fund where all of these bonds are maturing within the next 12 months. So these are very, very short-term bonds and they are Treasury bonds. These have the highest
quality of debt rating and it is very short-term bonds, meaning they are going to be paid back within the next 12 months. So we are talking about, basically, as low risk as you can go
when it comes to investments, aside from some kind of insured
investment from the bank, and those do not provide enough interest to even outpace inflation. And then 20% of your money goes into short-term investment grade bonds. Think about money being loaned to large American
corporations, like AT&T or CVS, these are the highest quality companies that have been around for a very long time with very high debt ratings from Moody's and Standard & Poor's, and that is what is meant
by investment grade. So these are very, very
high-quality companies with long operating histories and a very well established track record. Picture yourself loaning
money to corporations and companies like At&T, for example. And by doing this with your money, by sweeping that balance
out of your checking and savings account and
putting it into Smart Saver, like we said, right now they're looking at about a 2.09% yield after fees, meaning you're buying
power's being protected and your basically doing nothing here. You are allowing them to analyze the cash balance of your account and sweep that money back and forth to make sure you are not
losing out to inflation. Now, there are a couple of things that I want to talk about that differ when you look at having money
invested in short-term bonds versus having money in some kind of bank. And the number one thing that
I want to talk about here is FDIC insurance. When you leave your money in the bank, whether it's in a savings
account or a checking account, or a certificate of deposit, you are, typically, FDIC
insured for up to $250,000. That means that if that
bank goes insolvent and they don't have access
to that money for you, you're going to get that
money back from this insurance up to $250,000 and you have to understand that there is no insurance
in place for bonds. But before you get afraid of that, in order for you to lose the money that you invested with Smart Saver, we would have to see the US
Government going insolvent and not being able to
pay their debts back, and we would also have to be
seeing major corporations, like AT&T and CVS and, think
of the largest companies out there going bankrupt. It would have to be
the worst case scenario of, basically, the government
coming crashing down as well as large corporations, in order for you to lose the
money you put in Smart Saver that's being invested in
these short-term bonds. And the other thing that
you have to understand is that there is about a four
to five business day process between the money entering your account and leaving your account. So if you need immediate
access to your money, this is probably not
a good option for you. But if you would be okay with that, if you're okay with having
to wait four to five days for that money to come
back into your account, then that's not something that you would necessarily have to worry about, but I just believe that
is worth mentioning. And there are a couple of other benefits that are associated with
investing in US Treasury bonds, so I wanna go ahead and share
with you guys what those are. Number one, as we said,
they are pretty much the safest investment out there, outside of an FDIC
insured bank investment, and those do not pay enough,
typically to outpace inflation, or you do not have liquidity, you don't have ready access to your money. The second thing is that US Treasury bonds are exempt from local
taxes and state taxes, so if you're worried about
generating a large tax bill, that's going to relieve
some of that burden. So it is a great investment
for those two reasons because they are very safe and they, also, are easy on the tax bill. Now, is this the only
option when it comes to protecting the buying power of your money? Absolutely not, some people look at CDs that are offered by a bank, some people look at money markets. But understand that if you
do put your money into a CD maybe you're seeing 3% rates, but typically that's for
a three to four year term, and if you take your money out early you're going to get a penalty. Smart Saver is essentially
offering you protection of the buying power of your money with, pretty much, complete
access to that money at any point in time, if
you're willing to wait that three to five business day window for that money to come
back into your account. And, like I said, if you guys are looking to learn more about other options, if you're not a fan of this, I have a bunch of videos about investing and other ways to protect the
buying power of your money. And I'll also link up to that
video that Jeff Rose did. And if you guys do want
to check out Betterment or Smart Saver, I have a link down below. It is an affiliate link, you
guys don't have to use it, but understand that by doing so, you are helping to support my channel and allowing me to make
more videos like this. But thank you so much
for watching this video. Like I said, let me know in
the comment section down below if this is the first time
you're learning this lesson, and make sure you are sharing
this with other people who are, basically, losing
money every single year by saving it in the bank. But thank you so much for watching, and I will see you guys in the next video.
