But according to billionaire Mark Cuban, savings alone won’t make you rich.
“Can you save a million dollars? You can, but you really have to be disciplined,” Cuban told Money during a recent interview. “You also have to be a little bit of a risk taker. Part of the risk is maybe putting money into a low-cost mutual fund.” Index funds can be a good choice to start out.
The idea is to take advantage of compound interest. The driving force behind investments, it dictates that any interest earned accrues interest on itself, so a little money invested now can end up being more than a lot of money invested later. In short: If you want to become a millionaire, the earlier you start investing, the better.
Cuban’s point also gets at the heart of the concept many Americans miss: how to effectively build wealth. When a new survey by Bankrate.com asked more than 1,000 Americans what they consider the best way to invest money they won’t need for 10 or more years, the most popular answer, chosen by 28 percent of respondents, was to use it to buy real estate. Zero-risk cash investments, such as high-yield savings accounts, came in second with 23 percent of respondents.
Investing in the stock market took third place, with just 17 percent of respondents.
But although owning a home and contributing to a high-yield savings account can both help you build wealth, neither are the optimal way to maximize returns in the long run, Bankrate points out.
Bankrate cites a study from the London Business School and Credit Suisse, which found that after adjusting for inflation, housing offered returns around 1.3 percent per year from 1900 to 2011, while stocks performed more than four times better. So while financial experts, such as self-made millionaire David Bach argue that a home is a crucial investment, real estate is still not a substitute for a retirement fund.
High-yield savings accounts offer higher dividends than traditional ones — 1 percent returns versus 0.01 percent — but they aren’t a replacement, either. “Over the past 10 years, even including the financial crisis, stocks have returned an average of 8.6 percent per year,” Bankrate reports.
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