Don’t Save Money

Don’t Save Money

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Yes, you read that correctly: don’t save money.

You may have heard the old saying that ‘cash is king’. Once upon a time, this was a true statement. Since then, cash has been toppled from the throne.

Saving money is like stagnant water, it’s not going to take you forward. This is because if you stash every dollar you earned into a piggy bank or bury it in the garden, you still will only have the sum you hid away – no more. And over time its purchasing power gets smaller.

The bank isn’t much better. If there’s one thing you take away from this article, let it be this: If your money is not keeping up with inflation then your wealth is decreasing.

So, what's the alternative? Investing. Unlike saving, investing involves putting your money into assets such as shares, real estate, or managed funds to generate returns that outpace inflation. To grow wealth, you must beat inflation.

The Case Against Saving

Let's start with a hard truth: money in the bank doesn't really grow. In a savings account money often just keeps pace with inflation. This means that while your cash is technically safe, its purchasing power will erode over time.

Inflation and Purchasing Power

Money has power. Today with $10 you can purchase a coffee and get some change. But every year inflation pushes the price of coffee up and reduces your money’s purchasing power. Eventually, $10 won’t be enough. The Reserve Bank of New Zealand has a fantastic calculator that shows how inflation changes the power of money.

For example, the inflation calculator shows that a house purchased for $600,000 in 2010 would cost a whopping $1,111,514 if purchased in 2020. This represents a 46% drop in purchasing power over that decade.

The infamous cartel boss Pablo Escobar was one of the wealthiest drug lords in history, bringing in US$420 million each week in revenue. He reportedly spent US$2,500 per month on rubber bands just to keep all the stacks of bills together, and had to write off 10% of his cash as lost because rats would eat it, it would be water damaged, or lost.

If you leave your money in a bank account, you might as well have rats chewing their way through a portion of your money— just like Pablo Escobar.

How Much Will Cash Erode in the Bank

If you’re saving in a savings account or term deposits, you might think you’re doing better than Pablo Escobar because you’re receiving interest from the bank. But the rates of interest you receive as a saver are highly unlikely to ever sustainably be more than the rate of inflation. In other words, the bank interest rate is (nearly) always less than the rate of inflation, even before tax is considered.

Consider this scenario. You diligently save $10,000 in a bank account with a 5% annual interest rate. After a year, you have earned $500 in interest, great! But meanwhile, inflation has risen by 5%. In that case, the real rate of return you’ve received is zero, because the inflation and the interest you have received cancel each other out. Except you must pay income tax on the $500 interest you received, so once tax is deducted from your $500, you’ll find you’ve actually lost purchasing power.

Money Printing (“quantitative easing”)

We all like to think of money as a scarce object, that needs our careful protection.

Really, the opposite is true. Money isn’t scarce at all – governments worldwide print it freely! Nowadays, they don’t even need to print it, it just takes a few clicks of a mouse and new money supply is freely created. This devalues the currency by increasing supply, which fuels inflation.

In an attempted moment of jest, the Reserve Bank of New Zealand Governor went viral when he joked about doing just that.

“It’s a great business to be in, central banking, you print money and people believe it.” Adrian Orr

People in attendance laughed because the comments are at least partly true, that's what makes any joke land. That is probably also why just one of the many videos of the comment has been viewed over 600,000 times.

Plan and Invest

If you want to create or keep true financial wealth, you need to accumulate scarce assets that can’t be easily recreated. Things like real estate (property) or good businesses (shares) can’t be made via a few clicks of a mouse – like money can. Assets like property or businesses produce income too and are therefore inherently valuable.

To say it another way, to accumulate wealth, you must invest.

That could be shares in your own company, or shares in several companies forming a diversified portfolio. It could be real estate, bonds, or investments such as managed funds that combine many tiny pieces of those things.

Before you invest: Emergency Fund and Short-Term Expenses

Growing wealth is a lot like building a house, you need to start with a strong foundation. That means sorting out any unnecessary debt first, having some savings in case unforeseen bills come up, and then investing. Here are five actionable steps you can take today to grow your wealth.

Saving money does still serve an important purpose: for instance, you need an emergency fund. Most recommend saving enough to cover 3-to-6 months' worth of living expenses in a readily accessible savings account. This provides a financial cushion in case of job loss, a bad illness which prevents you earning, major unexpected expenses, or other financial shocks. Typically, 3-4 months’ is the timeframe for income protection cover to kick-in should you need it, which is part of the reason why a sum based on covering expenses for this timeframe is suggested.

Savings accounts and term deposits are also usually suitable for cash that is allocated to be spent within the next 12-24 months, or any funds that are set aside specifically ready and available to seize investment opportunities that may present.

Once funds for emergency purposes and any near-term expenses are separated, all other funds should be dedicated to building and/or prolonging your wealth.

The Bottom Line: Don’t Save Money

Cash may be king for short periods, but over the long-haul investments reign supreme. At the end of the day, saving alone is not enough to build real wealth. Money stuck in savings accounts or term deposits won’t keep up with inflation over any long stretch of time, let alone outpace in real terms. The evidence is clear - to get ahead financially, you need to put your money to work through investing.

Don’t save your money, invest it. To do so, you can learn more about some of the wide range of investment choices available to you, or it’d be our pleasure to provide you with a free and no obligation initial consultation with one of our financial advisers.

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