Some people save for real, and some just nominally.
People who save for real are mindful of inflation. You think your money is safe in your bank account? It’s earning interest, you tell yourself. Sure it is, but how much interest, exactly? And what’s inflation at? You need these things to calculate your real savings.
Inflation measures how much prices are going up. If inflation rose at 2% (which it has been annually on average for awhile now), then that means prices are up 2%. It also means your salary (which hasn’t changed in the past year) is giving you less buying-power than before. The prices of everything around you are going up, and yet your paycheck is staying the same. So you can buy...less.
The same applies to your savings account. If your savings account is only giving you 1% interest per year (APY) and inflation is rising at 2% per year, then your real savings are going down by 1% each year. Your money is eroding away...and you don’t even know it. Well, now you do. The average APY on savings accounts in 0.09% according to the FDIC, so...yeah. Everyone’s money is eroding away if it’s not keeping up with inflation.
Think about it this way: Grandma Ethel kept $100 in her savings account with 1% interest starting in 1959, and never added or took out any money. Between 1959 and 2019, that $100 dollars grew to $181.67
Back in 1959, $100 could buy you 200 movie tickets. Grandma Ethel could’ve watched 200 movies with that money. Today, her $181.67 could now only buy her 20 movie tickets. Movie ticket prices went up from an average of 50 cents to just over $9. Even though her savings were earning interest, prices were rising much faster.
In macroeconomics, real savings matters, too. Keynes’ famous IS-LM model, where S is savings, can be done in real (rather than nominal) terms to compare results across time.
Now go check your bank account APY, and find one that’s at least 2%. Oh, and one for Grandma Ethel, too.
Related or Semi-related Video
Finance: What is stock based compensatio...7 Views
Finance a la shmoop What is stock based compensation While
investors want management with skin in the game when your
ceo has ninety eight percent of her net worth tied
up in the stock of the company that she's running
well presumably she runs it better or at least in
theory anyway So over time management has been paid in
equity ownership grants as well as in cash that is
company management gets paid in stock options and in stock
or rather shares of the company simply granted to them
in lieu of cash Why do companies not just pay
cash while they want management toe Have that whole ownership
thing going for them to act like owners You know
not just like union employees They want management with direct
stakes in how well or pa poorly the business per
forms in the long run and think about the dynamics
of a ceo getting paid even a relatively huge million
dollars a year in salary and nothing else that's it
well that ceo takes a company from four hundred million
dollars in sales and thirty million in profits to five
years later two billion dollars in sales and for three
Hundred million in profits that is the ceo made the
company at least ten times more valuable certainly ten times
more profitable and in five years that's really good But
that ceo just got their single million dollars a year
each year along the way Well that ceo would not
have financially participated personally in making shareholders so much wealthier
and that's not fair right If management of the company
makes huge returns for investors doesn't it seem right that
management should have huge returns for themselves and not just
a basic salary and male Maybe a little bit of
a bonus there too well some companies loan money at
low interest rates to ceos and other top execs so
that their ableto buy shares in the company leveraged well
Other companies just grant shares to management and still others
just grant stock options is kind of a spiff above
their cash compensation So yeah it's all about having skin
in the game which if you play football without sufficient 00:02:11.45 --> [endTime] padding is a definite possibility
Up Next
What are Gross Domestic Product (GDP) and Gross National Product (GNP)? The Gross Domestic Product is the sum total value of products and services...
What is real return? Real return is the actual return made from an investment after inflation is factored in. Return is expressed as a percentage c...