A Naira Saved is No Longer A Naira Earned
Opening a savings account is one of the first steps toward reaching a financial goal — they’re ideal for building a nest egg and financial discipline. But it’s not the right place to put your money if you’re looking for high returns, especially in today’s low-rate environment. These days, the annual interest available on current accounts and even savings accounts, from banks and building societies, is extraordinarily low.
Many people also still think that cash on deposit still represents the safe and sensible choice for those more interested in long-term accumulation of capital or enjoying a steady income. If you are approaching or in retirement, you will be seeking a regular income for day-to-day living expenses and a range of investments including, equities, bonds, and property can provide a regular and attractive level of income often higher than the level of inflation. It is no news that the cost of living in Nigeria is now quite high, as well as inflation which has a way of eating into savings.
Academic evidence shows that most stock markets have delivered returns well ahead of inflation over almost all periods of 10 years or more. For instance, over the space of 10 years, an average return of just over 7% a year from investing will double your original sum. So, stock market returns have usually done a better job than cash on deposit at preserving value against inflation.
In the last six years, putting money into the bank has not exactly earned more than mere pennies in interest which is practically a waste of time because even if your bank account is in a big bank, you might only earn a meager 0.03% on your savings, so investments are a smart alternative to a barely 1% savings account.
Most economists believe that investing your money (though wisely) is a great way of creating real wealth- a major reason is that when you invest, it’s typically not as easy to get your hands on it quickly as compared to a savings account. Besides, investments have the potential for higher return than your regular savings.
One of the advantages associated with long-term investing is the potential for compounding. Here’s how it works: When your investments produce earnings, those earnings get reinvested and can earn even more. The more time your money stays invested, the greater the opportunity for compounding and growth.
Britain’s 38 million savers have been urged to invest their money in the stock market after being warned that for many of them it is now a “waste of time” putting their cash into a savings account.
The warning came after official figures indicated that the cost of living had increased once again in November, making it nearly impossible to earn a real rate of return on any bank or building society savings product which is practically relatable to the situation in Nigeria.
In order for your savings to grow in real terms over time, they need to earn a rate of return after tax that is greater than the rate of inflation. In today’s low interest rate environment finding a savings account that delivers a return above the current inflation rate can be difficult. So it’s worth considering investments which have the potential to outperform inflation.
So if your goal is to reach financial freedom sooner than later, it’s better to invest.
Learn how to start investing with our Financial Literacy Course.
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REFERENCES
Chiara Cavaglieri, Julian Knight [2013]. A savings account is not the best place to save. New York. www.independent.co.uk
Harry Wallop, Garry white [2010]. Forget savings account, think of shares/the telegraph investor. London. www.telegraph.co.uk/finance
Nick sketch [2012]. Saving or investing: can they help beat inflation? BBCnews/business. (retrieved from http://www.bbc.com/news/business-20032135)
F&C investments. [2016]. Benefits of investing. London. Retrieved from http://www.fandc.com/uk/private-investors/guide-to-investing/benefits-of-investing/
