How saving your money makes you poorer.
Bankers laugh at savers all the time. Here’s why…
I know saying saving could make you poorer sounds like absolute nonsense but bankers know this and laugh at savers all the time and as an economist, I totally get the joke. I’m not saying saving is bad, don’t get me wrong. But people execute savings in a way that hurts them financially.
Investopedia defines saving as — the money a person has leftover when they subtract their consumer spending from their disposable income over a given time period.
So you’ve drawn up a masterplan to own a home in ten years. You open a separate account where you stash a percentage of income and calculate the number of years it’ll take you to reach that golden figure where you can go all out and splash on the home of your dreams. This right here is how saving can make you poorer and I’m sorry to be the one to break it to you but, you may never afford that dream house.
If you believe that saving your money leads to financial freedom, I have a bridge to sell to you.
If you are putting in work to get your money and don’t learn how it works, it’s going to ruin you financially. Saving money to have a big pile of it will not turn out as you expect it should. One thing needs to change — your mindset on money.
I dream about financial freedom, travelling the world and owning a vacation home on a fun little island. Achieving this isn’t something I can save my way to. There are facts about money that needs to be considered to enable you to live the good no-hassle life. Knowing these facts and acting on them will positively impact your financial life.
A High Income Is Not Enough
Your current job could be paying you a fortune, you may be self-employed and racking up tons of cash but this does not guarantee financial freedom. Making money without knowing the rules about money could hurt you in ways you never expected.
You’re just a google search away from finding several formerly wealthy people who became broke as a result of lack of knowledge on how money works.
Saving More Is Not Enough
Yup! Increasing the percentage of your disposable income you direct to your savings account still does not put you on the track you want to be. You’ll end up being a banker’s joke.
Take a look at what has happened to the Naira over the past decades… :’(
This image illustrates the devastating impact inflation has had on the Naira. It does not make sense to save and have inflation eat away your hard-earned money. This is one of the major reason why you’re a joke to the bankers. They know this and act against it. What’s worse is that they use your money to do it.
Rather Than Save Your Money, Do This…
Invest, invest and invest.
The mindest change you need is to switch from saving to investing, this enables you to protect your money and plan the life you’ve always dreamed about. We have seen how inflation destroyed the value of the Naira over the years. It’s worthy to note that inflation eats up every fiat currency, some faster than some.
The proven way to make your money work for you is to invest it. That’s what banker’s do with your money and that’s why they keep laughing at savers.
What do you invest in?
There are different assets you could invest in to save your money from the money eater — inflation.
- Gold
- Bonds
- Real Estate
- Stocks
- Cryptocurrencies
This next step is extremely important when investing
Knowing what to invest in is great. But there’s one more thing you need to do to ensure your money is protected — Diversification.
When investing in some or all of the above assets, you need to diversify your money amongst them. Knowing what percentage of your money you invest in each of the asset class is the tricky part.
What determines how you diversify?
- Age
The younger you are, the more time you have to get over any market downturn and the more open to risks you may be. An older person does not have as much time as you do and should limit their risk exposure by opting for less volatile asset classes. - Pockets
How much do you have? Someone with N500,000 may want to invest in a more liquid asset in case they need to withdraw some funds while someone with N5,000,000 may be more willing to invest in assets that are not as liquid because they have more money they can put in the market for a longer period.
Learn about the asset classes
You will need to do your research when investing. Asset classes are broad and contain a lot of subclasses which you may need to know to properly target your investments. An individual interested in banking stocks could invest in an index fund that tracks the performance of top banks in the country. Another individual might be interested in investing in the stocks of banks that implementing a new technology — a subclass.
In Nigeria, mutual funds are a very popular option. Most fund managers invest in a mix of government bonds and lending to the biggest companies e.g Dangote Cement. These types of funds balance risks to provide a low-risk portfolio.
Cryptocurrencies are currently the most volatile asset class and are one of my personal favourites. I’m young, I have time to wither its ups and downs and I’m bullish on their prospects. *Be warned, trading a highly volatile asset can result in the loss of your capital. Invest what you can afford to lose.
As you can see, investing comes with a wide variety of options, the more you learn about them the easier it is for you to find a mix that works.
Always consider the state of the economy
The state of the economy could help in determining where you should and shouldn’t invest your money. In 2020, we’ve witnessed a global financial crisis that has seen interest rates drop to record lows (treasury bills @ 2.4%). Inflation rate has increased and the value of money is being eaten away.
You may want to purchase crashed stocks because you feel they are cheaper rather than buying government bonds that currently pay close to nothing.
Another option you have is to invest in assets that are more resistant to inflation like real estate, gold and commodities.
In Conclusion…
Keeping your money in your savings account can ruin you financially. Invest your money in assets you have knowledge about and diversify your portfolio according to your risk appetite, age and your financial status. It is worthy to note that if you are currently in debt, you have no business investing and should seek to be debt-free before beginning your investment journey.
Investing is not a walk in the park, there will be ups and downs but with wise investment decisions, you will become richer and charge towards financial freedom.
