Risking the Piggy

Remember our last discussion? Where we went back to our childhoods and decided whether we wanted to have a piggy bank (saving) or open a lemonade stand (investing)?

I don’t know about you, but I have younger brothers. They drove me nuts … I felt like I never had my own space. I was fortunate to have my own room growing up, being the only girl, but those boys were always there. I just wanted to listen to my music or watch my tv shows, but they always needed something. Did they really needs snacks after school? Couldn’t they just wait for dinner?

Apparently not. Apparently they needed to eat too … taking all of the good cereal that I was trying to save for myself. I am sure you can guess how that went for me.

Here lies one risk with saving. We like to think that when we set something aside for later use, that something will still be there when we decide to use it. In this case, it was cereal, but your piggy bank could also be at risk.

Let’s say you were mowing lawns (please give me some grace here … obviously we aren’t working for pennies anymore; I am trying to keep it simple for illustrative purposes) and you made 25 pennies. You put those pennies into your piggy bank for safekeeping, with a goal of saving up to one whole dollar to buy yourself an ice cream and maybe some candy or soda.

What you didn’t account for, however, were those sneaky little siblings. Your little sister doesn’t understand how hard you have worked for those pennies, and she sees the kids across the street selling lemonade. She takes your piggy bank and smashes it on the floor. She takes your saved up pennies and buys all of the lemonade for herself and her little friends.

Now, you have no money! Perhaps you are fortunate with parents who will help you — when they come home from work and you tell them what happened, they absorb the cost of your little sister taking your money and give you your 25 pennies.

[Although now you need to find another piggy bank.]

This is like the U.S. banking system. The Federal Government insures deposits made into banks that are FDIC Insured. Most of the banks you will come across are, in fact, FDIC Insured. There are complexities to this as well, which we will also get into at a later date, but it is something for you to understand about saving. Basically, up to a certain amount of money, each bank is backed by the government in the event of a bank failure — this can occur for any number of reasons, which we will reserve for a later discussion.

The other risk you have in saving is that by the time you achieve your goal of one whole dollar saved, that ice cream is more expensive. So now, you can only get either the ice cream or the candy or the soda. This is inflation risk, and it is something many of us do not properly account for in our savings goals. There are ways to mitigate this risk, which (you guessed it) we will dig into later. For now, we just want to understand the concept.

Until next time,

~Jacqui O.