The Huge Mistake Millions Are Making Today

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When times get tough, you want to batten down the hatches and eliminate as much uncertainty as you can. Unfortunately, with the moves that millions of Americans are making with their money, the only certain thing is that they're going to end up big losers.

Where the money is
According to the research firm Market Rates Insight, banks have never seen more money flood into federally insured checking, savings, money market, and CD accounts. The firm counted an all-time high of $9.8 trillion held in those accounts, up by about 3.5% in the first half of 2011.

Certainly, there's no shortage of reasons why people are moving their money into the most secure locations they can find. The plunge in the stock market over the past month has reminded investors how risky stocks can be and has reawakened fears of a repeat of the 2008 financial crisis. The debt-ceiling debate in July has reduced confidence that the federal government can solve the economic problems that the country faces. Moreover, with economic problems plaguing Europe and even red-hot emerging markets starting to face difficult conditions like high price inflation, investors are running out of places to hide.

But as comforting as having money in the bank can be, it's not a viable investing strategy for anyone -- except perhaps those who are rich enough to live off their money regardless of whether it earns income or not. For most of us, the problem lies in the fact that we need our money to grow to keep up with the two biggest negatives that investors have to deal with: inflation and taxes.

The chokehold of the invisible hand
Government statistics suggest that inflation isn't a huge problem. But lately, we've all seen the impact of inflation creep into our lives. It has hit food prices , with Starbucks (Nasdaq: SBUX) , McDonald's ( MCD ) , and Kraft ( KFT ) among the many companies that have raised prices to offset higher costs. It has put apparel retailers Gap ( GPS ) and Aeropostale ( ARO ) in the uncomfortable position of either having to eat higher costs by reducing profit margins or try to hike prices in a lousy economy. And it's hitting those who need health care, as expensive medical devices and drugs threaten to disrupt the entire Medicare system and put health insurance companies -- and the consumers who pay for insurance policies -- at risk.

Even if your personal inflation rate matches the government's Consumer Price Index, a historical rate of about 3% means that if you're getting less than 1% on your money in a bank account -- as nearly everyone is right now -- then your nest egg is losing purchasing power day in and day out.

Moreover, taxes can be a big drag on your portfolio. Of course, if you are getting next to no interest on your bank savings, then your taxes on that negligible income won't be that high. But taxes serve as a reminder that you have to earn even more just to keep from seeing your after-tax purchasing power lose ground.

The big winners from the savings trend
If anything, the trend toward using FDIC-insured bank accounts is a net positive to deposit-heavy banks. Citigroup ( C ) reported $866 billion in deposits for its most recent quarter, while Wells Fargo (WFC) had $853 billion. Bank of America actually topped the $1 trillion mark. All of those institutions benefit greatly from being able to access so much money from depositors without having to pay high interest rates.

Don't get me wrong: I'm not saying that you should go put all the money you have in savings and buy bank stocks with it. But making some kind of smarter investment than accepting a fraction of a percent in interest is a no-brainer -- no matter how much uncertainty there may be right now.

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Fool contributor Dan Caplinger tries to learn from his mistakes. You can follow him on Twitter here. He doesn't own any of the stocks mentioned in this article. The Motley Fool owns shares of Aeropostale, Citigroup, Gap, Starbucks, and Bank of America. The Fool owns shares of and has created a ratio put spread position on Wells Fargo. Motley Fool newsletter services have recommended buying shares of Starbucks and McDonald's. Try any of our Foolish newsletter services free for 30 days . We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Make no mistake: The Fool's disclosure policy is here for you.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Personal Finance

Referenced Stocks: ARO , C , GPS , KFT , MCD

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