this post was submitted on 09 Mar 2025
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A Boring Dystopia
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Yes your interest does also need to outpace inflation. Not seen a savings account that pays interest of anything like that right now. Nothing low risk is keeping up with inflation.
That's the thing, interest rates are almost always less than inflation. The only reason they flip is because inflation needs to be brought down.
The reason for this is that the government/economic model is designed to encourage spending. Holding money is effectively lost "opportunity" so the real value of the dollar is always pushed down.
Savings account interest rates are almost always less than inflation, true! Even worse, interest earned on savings accounts are subject to taxation as income, so effectively your highest bracket of taxation (in the USA at least).
However, no one with even the smallest shred of knowledge of retirement savings will tell you to park your entire retirement budget in a savings account and expect any kind of healthy return. Savings accounts are VERY safe investments. The deposits (not interest) are backed the the federal government up to $250,000 per person (and per bank). For better returns you need more risk. The basic index funds in the stock market such as the S&P500 return an average of 7% per year over a long period of time. This means that some years will be in the toilet at negative returns, while others. Two years ago it was 24%! Even last year was 23%! All of this is also ignoring the massive benefit of saving for retirement in a 401k or IRA where you can skip or defer the taxation on retirement income achieving even higher effective returns.
S&P500 historical annual returns:
source
This mean that if you had $100 in a standard boring S&P500 index fund at the beginning of 2023, you'd have $124 at the end of 2023. At the end of 2024, having not invested another single penny, you would have had $152.52 at the end of 2024. A savings account with a 5% interest rate and that same $100 deposit would be $105 at the end of 2023 and $110.25 at the end of 2024. This small amount difference doesn't sound like much, but now imagine it was some 35 year old's retirement fund with $100,000. End of 2023 would have that value at $124,000 and the end of 2024 would be $152,520. So an extra $52k growth in just two years!!!.
My example above is compounding in only two years. Now look at all those green years and you can get an idea of the power of compound interest.
I know you're saying this like its a bad thing, but if you really want to see the bad thing, imagine the reverse of what you said is true. Imagine the government was pushing deflationary position! Imagine your dollar would be worth more tomorrow if you didn't spend it today. People would stop buying all but the absolute essentials. Why buy a car today for $30,000, when if you waited it would only be $20,000 next year. Suddenly cars sales drop to nearly non-existent. Auto workers would be put out of work in droves. That is just one example. It would ripple throughout the economy negatively.
Yeah, I was calling out savings accounts cause that's what I imagine most people are talking about when mentioning compound interest. The video is talking about the false promise of compound interest and I wanted to call out the real reason it doesn't work.
As for the standard 2-3% inflation the fed targets. I wasn't saying it was bad, just that it means that you loose value if your money isn't growing. I can't say I studied economic theory far enough to have a meaningful stance on if that's good or bad.
I don't think most people think of a savings account as the main example of compounding interest. A bond would probably be a better example.
If you're citing the saving account as the failure of compound interest, it isn't because of a low 5% return, its because its not a fairly consistent return at 5%. If there was a consistent 5% return year over year savings account that would be a great investment even with inflation for the portion of your investment you needed to keep safe. This is essentially what bonds are.