Becoming a millionaire: Why savings accounts aren’t the answer

Who wants to be a millionaire? Well, we all probably do. Having at least $1 million in assets outside the family home would put you far down the path of financial independence, and ensure a comfortable retirement without depending on the Age Pension. But you should think again if you think that you can get there by using savings accounts alone.

Almost every Australian has a savings account. It’s a bank account that pays you a competitive interest rate in exchange for trusting your bank or financial institution with your hard-earned capital.

Thanks to the highest interest rates we’ve seen in more than a decade, some savings accounts are offering interest rates as high as 5.5% today.

Investors not used to seeing these kinds of returns on ‘safe’ investments like cash savings accounts and term deposits might think that they can easily save their way to $1 million, without investing in ‘riskier’ assets like ASX shares.

But that would be a mistake, according to renowned AMP economist Shane Oliver.

Savings accounts won’t make you rich

In a recent edition of ‘Oliver’s Insights’, the economist starts by quoting investment author Robert Allen: “How many millionaires do you know who have become wealthy by investing in savings accounts?”.

He then goes on to say this:

Cash and bank deposits are low risk and fine for near term spending requirements and emergency funds, but they won’t build wealth over long periods of time… Despite periodic setbacks… shares and other growth assets like property… provide much higher returns over the long term than cash and bank deposits.

Oliver went on to show investors that $1 invested in cash assets in January 1900 would be worth $256 today. That’s with an average annual return of 4.6%.

In contrast, Oliver highlights that if an investor put that $1 into ASX shares instead, it would be worth a staggering $869,273 today, with an average return of 11.7% per annum.

That’s a big price to pay for ‘safety’.

This is a view that is shared here at the Motley Fool. Every year, our chief investment officer Scott Phillips likes to look at the annual ‘Vanguard Chart’.

This chart is released by index fund provider Vanguard. Every year it shows that investing in ASX shares trounces the return of cash over any significant period of time.

Last year’s chart proved that a 30-year investment in ASX shares produced an average return of 9.2% per annum. In contrast, cash investments gave back just 4.2% per annum.

Thanks to the power of compounding, these returns can make for an eye-watering difference the longer you can invest, as Oliver’s numbers prove.

So if you’re serious about building wealth and becoming a millionaire, now you know that cash is indeed trash, and ASX shares are a far better path to follow.

The post Becoming a millionaire: Why savings accounts aren’t the answer appeared first on The Motley Fool Australia.

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Motley Fool contributor Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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