This article from 2008 illustrates one factor to consider in investing for the future, and why just keeping money in a savings account may not be sufficient. The value of our money has dropped since 2008, as politicians spend money the government doesn’t have to buy votes from the greedy and the unwary.
This story begins with some people who opened a restaurant in Caldwell in 1964. Their specialty was a baked chicken dinner with all the trimmings for $1.25. Suppose that in 1964 you had a little money to spare and decided to save $1.25 in hope of affording a baked chicken dinner in the future, perhaps in 2008.
Imagine that you put the money in a savings bond. If you could earn an average of 5.25% interest per year, this year you would be able to cash in the bond, pay tax on the interest, and buy a fine chicken dinner.
Of course there is no guarantee that saving money today at 5.25% will be as adequate in the future as it has been in the past. All the same, there have been many economic problems in the last 44 years; many predictions of catastrophe have come and gone, and yet a saver has been able to maintain his or her ability to buy a chicken dinner over that time.
This story used savings bonds because they were one of the few ways people in 1964 could save money and earn interest without paying taxes each year. Other ways of letting money build without paying yearly tax bills were, and are, annuities and stocks of growth companies that pay no dividends. We have more options in 2008: 401(k) plans, Traditional IRAs, and Roth IRAs, to name the most popular tax-postponing methods.
So it is useful, and practical, to think of saving a dollar now in order to buy a dollar’s worth of goods in the future. Getting 5.25% on a savings account or a savings bond is not always possible. However, a balanced mutual fund (which invests in a mix of stocks and bonds) or a dividend-paying high quality stock should accomplish the goal.