How much value will money lose if left in a checking account?

Question

My younger brother has been working for over 3 years now and he has very good financial discipline so he has been able to save more than 30k just from his paychecks (not including 401k which his company gives).

But the problem is he is only keeping this money in a checking account because our religion does not allow us to take any kind of interest.

I have been telling him to put that money into some kind of investment because it loses value due to inflation.

Is this true given the inflation rate today and the value of the dollar? And if so, what is the best way to gauge how much of that amount is lost each year or each month?

Answer 1

The average inflation rate in the US over the last 17 years is 2.17% per year (source).

So he has $30,000 now. If another 3 years go by and he doesn't invest it in anything whatsoever, he would have 30,000/(1.0217³) = $28,128 equivalent buying power 3 years from now.

I would not focus on how much money he is losing per year, but instead focus on the religious constraint of not gaining interest. What was the intent of the religious prophet or person who was discussing this issue? If he invested the money with a 1% interest rate, and split the profit down the middle, half of it for his savings and half of it given to a charity of his choice, would that be something that would be likely to change his behavior? Consider this approach if you're trying to help someone to understand the ramifications of a financial.

Answer 2

He'll lose money in two ways: 1. The value of his money will decline with inflation. Inflation in the US has been running about 2% per year, so he'll effectively lose 2% every year. 2. There's the opportunity cost of the money he COULD make if he invested the money in some way. For example, the stock market has been averaging about 7% per year over the course of the last few decades. If instead of investing the money in the stock market he leaves it sitting in a checking account, he is losing the 7% potential gain.

You don't say what your religion is. (Muslim, perhaps? Muslims tend to take rules against charging interest pretty seriously. But whatever.) I'm a Christian and while most Christians ignore the prohibitions in the Bible against lending money at interest, I take them seriously and so I do not put my money in interest-bearing accounts. But investing in the stock market is an entirely different thing from loaning money at interest. By investing in the stock market I am buying a share of a company. I am now a part owner. The Bible most certainly does not prohibit investing in a business. There's a huge difference between investing in a business that provides valuable services to your neighbors in return for payment, and exploiting a poor person by loaning him money and demanding exorbitant interest.