is my logic wrong here, like shouldnt any sane person then invest virtually all their money?
i suppose the main counterargument is that its safer in a bank, anyway im not too knowledgeable so i wanna hear what people have to say here
is my logic wrong here, like shouldnt any sane person then invest virtually all their money?
i suppose the main counterargument is that its safer in a bank, anyway im not too knowledgeable so i wanna hear what people have to say here
The usual recommendation (after paying all debt) goes something along the lines of having:
Any amount that is not invested is depreciated by inflation, so you are guaranteed to be losing money by “saving” money in a bank account. It makes sense to pay for the fluidity and safety of an emergency fund, but it does not make sense to save long term otherwise. At the very least, one should choose a low-risk investment vehicle that can match up to inflation. There are some low-risk ETFs worth looking into for the risk-averse saver.
This makes sense yeah. Im curious, does the bank rely on people having “too much” money in their bank? like more than the emergency fund? if everybody followed this advice, would the bank be in financial trouble?
I wouldn’t say they rely on it, but they do take advantage of it. Banks do many things to make money.
They are only actually required to have a certain percentage of the money they “have” on hand not being invested. This amount has constantly been shrinking in the US, and was actually reduced to zero with a lot of asterisks during the beginning of the Covid pandemic.
Realistically, if there was a decrease in the amount of money people were saving rather than investing and it was negatively effecting their business they would just have the reserve requirements lowered even more.
The main function of the banks is to give out loans. All other functions are only there to assist in this main function.
Good in general, but one thing - it isn’t always a good financial decision to pay debt down. It depends on interest rates. If the bank/credit card/whatever is charging you less interest than you can make on investing, you should choose to invest instead.
Example 1 Credit card charging 20% and expected return on investment 5%. In this situation you should pay the debt.
Example 2 Mortgage at 3% and expected return on investment of 5%. Investing will net you 2% (5%-3%) a year more than paying off your loan.
Note that paying a loan is a guaranteed return while investing is a gamble, so you have to weigh that in personally.