One of the things often overlooked when comparing investment return in shares to interest on money in a savings account is that tax is handled very differently. If you are an average wage earner (not retired) with shares (disregard dividends/distributions for now) you will not have to pay tax on any capital gain until you sell them. You can time the selling such that it coincides with a time that you are not earning much money (eg retirement). If the same person has money in a savings account, any interest earned must be declared on that year's tax return such that you cannot defer the capital gain to a more tax effective time. This greatly affects compounding over time. 5% return in a share investment continues to compound over time where as 5% interest in a savings account results in only approx 3 to 3.3% that you get to keep at the end of each year.
Great episode guys, I’ve been watching you for a while and find all information very valuable!! My question is, hypothetically, if my emergency fund is now $50k in a bank account, excluding investments and extra mortgage repayments, in five years, this money is going to be worth less due to inflation. So, do you add more to your emergency fund or just add everything after this to investment?
