Putting some money away for a rainy day is a beneficial money habit to have and can help you to live a comfortable life even when hitting a financial dry season. However, saving money every month is definitely not the winning strategy when trying to accumulate wealth.
The primary reason why saving money will not make you rich is because of continual inflation. Inflation can be defined as the rate at which money depreciates over time. This simply means that the rising costs of products and services will not permit you to have the same quality lifestyle at your current purchasing price.
If you take a walk down memory lane you will recall that products and services were more affordable ten years back because you were able to buy high-quality goods at a much lower asking price. The reality is that this will also be the case ten years from now.
This means that if you were to put your money into a savings account the amount of interest you get on those savings should be higher than the current inflation rate. Bear in mind that the inflation rate also rises annually and is heavily dependent on the economy.
A savings account with a set interest rate may sound attractive at first but it is important to account for the increasing inflation rate over the set period of time that you plan on saving, especially if you want to save long term.
Saving Benefits Your Bank
You will always receive a much smaller interest rate on your savings account compared to the interest rate banks charge bank debtors. Banks usually give away little financial reward and heavily penalise loaners. This means that at the end of the day, the bank is profiting a lot more from your savings account than you are.
Your savings account contributes to the bank’s trading capital that they use to loan out for business expansion or for investment purposes in capital goods. This ultimately helps the economy to grow which can benefit you in the long run, but there are no guarantees and the primary beneficiary is ultimately still the bank and the economy.
Another thing to look out for is added deductions on depositor accounts which can sometimes be higher than the earned interest rate. This means that the bank is essentially getting richer and the account holder is not financially benefitting at all.
Depending solely on a savings account to accumulate wealth means that you will need exceptional discipline in order to not go on a spending binge every once in a while.
Not only is saving according to a strict budget not sustainable but sometimes it is simply not practical. Personal finance has to take into account the human condition and emergency situations that can potentially leave large dents in your savings.
The fact that we have limited willpower makes a saving account as a means to riches an unreliable way to accumulate wealth. Continuously enforcing the mindset of saving money can also condition you to never invest your money so as to avoid any measure of risk.
Although caution should always be used when investing it does not mean that you should settle for just securing the earnings you have.
The Golden Rule
Saving will not make you rich but that does not mean you should cancel your savings account. Instead, you should use your savings account to multiply what you already have by taking a percentage of your annual savings and investing it.
There are plenty of other reasons that speak to the benefits of having a savings account. The important thing is not to rely solely on a savings account to get rich, but to use it in conjunction with other financial endeavours to receive the maximum financial benefit.
Invest Your Money
Depending on your level of risk tolerance you can narrow down the investment options that would work well for you. If you have never invested before or you’re not sure where exactly to start, it would be best to speak to a financial advisor so that you can get the financial support you need.
Setting specific goals that establish a minimum amount of money that you want to make within a specific timeframe will also help you to decide what type of investments you should make and give you an idea of how much you can afford to risk. Although investing is a great way to put your money to work you should never risk savings that are intended for emergency funding.
It’s best to thoroughly do your research and scout all the financial options available to you before committing to a long-term financial savings plan. Although a savings account won’t make you rich anytime soon, it is still a great financial resource and can help you to overcome small financial hurdles so you don’t need to take out payday loans.