What’s 1% of $1,000,000? Right, $10,000.
What is 1% of $10,000? Correct, $100.
So, if an individual does absolutely nothing (puts money into a regular savings account) with their $1 million, then they will earn $10,000 in one year. If you happen to have busted your ass to save $10,000 and you do nothing (put your money into a regular savings account earning 1% for one year), then you will make $100 in interest. Does that suck (for the person with $10k)? Of course it sucks.
But the reality is that you can’t let this suckage ruin your mental momentum. And on top of that, you can’t let this affect your risk tolerance. Your risk tolerance is basically a measure of how much risk you can handle. And if that $10k is your emergency reserves, then you shouldn’t being taking any risks with it at all. A financial emergency can get worse when you have to sell investments at a loss to access your emergency reserves.
One of the biggest complaints I hear on a regular basis is that “banks aren’t paying much in interest.” True, but when it come to emergency reserves, you really shouldn’t care. You need to fight the urge to take additional risks with your emergency money.
So yes, the rich do get richer. But it isn’t (in this situation) about special tax advantage or anything shady. It’s simply math.
Peter Dunn a.k.a. Pete the Planner® is an award-winning financial mind and a former comedian. He’s a USA TODAY columnist, author of ten books, and is the host of the popular radio show and podcast, The Pete the Planner Show. Pete is considered one of the foremost experts on financial wellness in the world, but he’s just as likely to talk your ear off about bass fishing.