Bank accounts reassure many investors. Your money's safe, and its growing at a decent pace. Or at least you think it is.
The problem is that money in a savings account that says it's paying 1.5% (if they're being generous) isn't actually yielding you 1.5%. The bank's not lying- there's just some not-so-obvious things it doesn't tell you.
The first thing is taxes. The interest you earn isn't tax-fee (unless you invest the money in municipal bonds that are federal and state tax free or in a retirement account, in which you generally pay the taxes later when you withdraw the money). Depending on your tax bracket, you may end up losing a third of that interest to taxes, which lowers 1.5% to 1%.
The second thing is inflation. Inflation in the US has been running 4.5% on average in the past 5 years (approx.). Inflation depresses the purchasing power of your investment's returns.
1% - 4.5%= -3.5%
After subtraction cost of inflation from your return, you've lost 3.5% on your investment.
Simpler terms: For every $1 you invested in the bank a year ago, despite the fact the bank paid you 1.5 pennies of interest, you're left with only 96.5 cents in real purchasing power in every dollar you had a yr ago. Lovely.