Saving money is part of the wealth creation puzzle. Hanging your entire financial future on cash saved in your bank account? Well no! It isn’t a winning strategy for anyone who wants to put themselves on the path to real financial freedom.
Which is you, right?
The difference between saving and investing
Saving money is putting it away in a bank account to be used for an emergency, future purchase or to invest.
Investing is buying assets like stocks, real estate, bonds, etc with the expectation that in the future (usually the long term) the investment will make money for you.
Your investments can fall under two broad definitions – income investments and growth investments.
Income investing involves building a portfolio of assets that generate regular cash payouts. While growth investing focuses on capital appreciation and the assets potential to produce either more earnings over the long haul or due to scarcity, be worth more over time.
I support the idea of saving money, of course. I’m not saying you should never sock your cash away in a bank account.
There are certain short-term financial goals where saving alone makes sense, like saving for a house deposit or buying a car.
Plus I definitely recommend having an emergency fund of at least 3 – 6 months of expenses saved for quick access when needed. It gives you that sleep-at-night factor that can’t be discounted!
However, with saving as your ONLY strategy, unless your income is stratospherically high it’s unlikely you’ll ever reach true financial freedom or have your dream retirement. And in circumstances like now, where interest rates are low and inflation is rising, your purchasing power of the cash in the bank is actually falling, right? Let me explain…
Saving Money, or is it losing money?
Remember when your favourite chocolate bar cost like 70cents? (Ok, maybe I’m not talking to the GEN Z readers here!)
These days it’s probably more like 2 or 3 bucks for that same chocolate high.
That’s inflation for you.
As the cost of living rises, our cash buys us less. Even if wages rise there is still a decline in purchasing power. What a $50 grocery shop bought 20 years ago looks very different from what it buys these days.
I won’t get into the minute details about how inflation works. Essentially, the value of the money you have stashed away in the bank NOW has more value at this moment than it will in the FUTURE thanks to inflation.
What does this mean for your savings?
The example of the chocolate bar is a small one but imagine scaling this to a big financial concept, like your retirement goal.
You might do the math today, decide how much you need to live a comfortable retirement and figure that saving $20k a year is going to be enough to get you to the goal.
But let’s say you’re in your late 20’s now, so by the time you hit retirement, factoring in the effects of inflation, the exact same ‘comfortable retirement’ goal might cost you double.
If you had your retirement savings held with the bank, the minimal rate you’ll receive in interest on a savings account is very unlikely to counter inflation on its own.
Let’s say your saving money in an Aussie bank, for example –
At the moment the rate you will receive on your money is less than 1%, and in most cases it’s even less than 0.5%. Miniscule at best.
With inflation now around 3%, your purchasing power is reducing; you’re losing money in real terms.
In another scenario where you’re savings rate kept pace with inflation, the return on your savings is still 0%.
Or, let’s say you were beating inflation but only receiving a net 1% return, this is still significantly less than what you could achieve by investing the money. Historical, conservative annual returns would be approximately an 8% return. And don’t get me started on what the compounding effect of an extra 7% means 🙂 Let’s just say it is HUGE.
The potential impact of inflation should be a huge motivator to stop simply saving money and start investing it.
Get that money out of your savings account and give it a purpose, get it working for you!
The goal is to find an investment vehicle (stocks, bonds, mutual funds, etc) that will bring you a higher rate of return than inflation. You’ll also need to consider the tax you’ll need to pay for the investment income.
The main reasons great savers never become great investors
For many people, the idea of investing can trigger two emotions – fear (investing is risky!) and confusion (I have no idea what I’m doing!).
These are two of the main reasons people never get started investing; which means they never get around to building real wealth.
I understand, if you’re a novice, from the outside looking in, the world of investing can seem intimidating and risky. Saving money seems like the safest option, but if you do the math; it’s actually the riskiest option in the long run. Think about that for a moment, who would have thought that putting your cash in the bank would be the riskiest option?
Don’t let fear or confusion hold you back from investing.
If you have nailed the habit of saving money, you have the potential to become a truly successful investor.
But ONLY if you can take that first step and that means using money from your ‘safer’ savings nest egg and getting started with investing. We need to get that money working hard for you, not being lazy in a bank account earning two fifths of stuff all.
The bottom line on saving money vs investing
“Rich people see every dollar as a ‘seed’ that can be planted to earn a hundred more dollars… then replanted to earn a thousand more dollars.” – T. Harv Eker, Secrets of the Millionaire Mind
Saving money is great and necessary for those short-term goals and the peace of mind of having an emergency fund. It’s just that saving is not the answer to real financial freedom.
Creating the financial lives of our dreams isn’t about how much money we earn or save. It’s about what we do with that money. Real wealth comes from investing, that’s what enables true financial freedom.
Has reading this article promoted a few thoughts about your own financial situation and action you may need to take?
Do you need to learn more about investing so you can have the confidence to move from saving to investing?
Grab your no-cost wealth accelerator call, where we can chat about your money goals, roadblocks and a plan to create the freedom you want. Just click here to schedule your time.