I see loads of investors or financial advisors saying that “buy assets. Money in the bank will mean nothing”. I don’t understand how spending helps even if it is on assets. How can one take loan and buy a house? If one has savings to see them through in case they get out of budget isn’t that better? Or is poor-person mentality?
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They are talking about money you won’t need.
Emergency funds and expenses money are not a part of that.
Usually people know about the “buy low, sell high” mantra but when it comes to doing it, some people hesitate with the mentality of “I think it’s too risky to invest the money, the economy is not doing good right now” so they end up on the end of “buy high, sell higher” which isn’t bad but the former is way more efficient.
The short version (_and best guess_):
* Money in the bank means money out of circulation. Buying assets = putting money back into the market.
* When you take out a loan, the bank is usually the lender, setting the interest rate and schedule of repayments. When you make a payment each month that money goes into a pot the investors pull from to make risky investments of their own. No house / loan = less money for them = no good.
Take any financial advce with a grain of salt. Most are not in the business of protecting anyone’s interests but their own.
When inflation happens, the value of the currency decreases. So $20 in 1980 had much more buying power than it does today.
Say, in 1980, you stored a $20 bill in a piggy bank. And you opened the piggy bank today. That 10 dollars is worth significantly less than it did in 1980.
Now if you used that money to buy stock in Apple. That $20 would be worth over $14,000 today.
So they are saying if you leave money in the bank, your money will depreciate and you will “lose” money. If you invest smartly, there’s a chance your money could increase.
I think you’re conflating general economic principles with personal finance practices.
All economic activity ultimately boils down to spending money. As Paul Krugman (not a fan of him generally but he just encapsulates this well) summarizes, “Your spending is my income and my spending is your income.” So when a recession hits, people get nervous. What if I get laid off, or get underwater on my house? So they tend to spend less money and save. That then creates less income opportunities for other people, which then causes more people to get nervous and spend less, which then creates even less earning opportunity. This process works in reverse, too, where people spending creates income opportunity which causes people to be more optimistic and spend more which then creates more income opportunity and so on, except supply becomes constrained so eventually it turns into inflation (sound familiar?).
What investors and FAs are saying on your other point is that cash consistently loses value based on inflation. Let’s say a new car costs $10,000 and you have $10,000 in the bank. Today, you can buy a car. But next year, that model will be priced at say $11,000, so now your $10,000 isn’t enough to buy you a new car, you’ve “lost purchasing power.” But let’s say instead, in year one you took that money and bought a property that appreciates ~10% a year. Well the new car costs $11,000 but you have a property worth $11,000. Because you invested, you still have the ability to buy a new car, you haven’t lost purchasing power. Ideally, you get more than inflation on the return, which means your purchasing power actually exceeds inflation and you get richer. However, IMO what those people often leave out is that investing is effectively compensation for risk, so it’s also possible that property becomes worth $9,000 and now you’ve lost out on both inflation and loss on the investment.
> If one has savings to see them through in case they get out of budget isn’t that better? Or is poor-person mentality?
My friend, I need you to understand that people like Grant Cardone and Robert Kiyosaki tailor their material specifically for “poor” people; rich people don’t follow them. Rich people own assets for sure, but they definitely keep sufficient cash to pay for expenses. I doubt there’s very many rich people doing things like no-money down real estate.
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