Bad News — Your Savings Won’t Make You Rich
It’s the year 2000. The beginning of the end of the dot com boom.
A youthful Amit has just emerged from the cocoon of his MBA, blinking tentatively in the bright light of adulthood, mildly surprised to realise he has a job with a consulting company specialising in one of the hot new sectors of the time — CRM.
Against all odds, and with zero knowledge of how to do actual ‘work’, he’d managed to con someone into paying him to do stuff.
Cool.
He dives into his new role head first. Adulting is fun. Wake up, get dressed, head to work with your flatmates, code all day in between swigs of free Coke and coffee, marvel that the code actually works, grab dinner with said flatmates, get home, sleep.
Repeat.
And then, at the end of 30 days, a miracle! Amit’s spanking new bank account, thus far somnambulant, shakes itself awake long enough to register a deposit.
Rs. 15,000
Amit can’t believe his eyes. It’s real. Fifteen thousand rupees. More money than he’s ever been responsible for his entire life.
“Party!” yells his right brain, throwing its hat in the air.
“Savings,” whispers the left, gravely thinking about his future.
… and Amit, being generally a disciplined sort, saves it.
And so it goes, month after month. In fact, there isn’t a single month when he spends more than he earns. His savings account is always in the black, and growing. Not by a lot, since 15k rupees isn’t much, especially in dollars, but enough to keep him happy.
Amit has dreams. He’d save as much as he could. Then he’d be able to afford a car, and an apartment eventually. And put his future kids into good schools. And take care of his parents as they grew older, like they had looked after his grandparents.
Life is good.
Cut to a couple of years later.
There are just a few weeks to go to the wedding, a much-anticipated, lavish affair like so many weddings in India. Amit and S* parents had paid for everything, down to the last detail — and it was a staggering sum.
Feeling guilty about flushing their parents’ savings down the toilet, Amit and S* decide they’d at least pay for their own honeymoon. But where should they go?
France. Of course. That eternal beacon of love and romance.
They are unanimous.
They plan to be there for 2 weeks. Paris, of course is on the itinerary. But also Chamonix, Bordeaux, Nice and, what the heck, why not throw in the picturesque chateaus of the Loire Valley? After all, when will they ever get to go back? It’s their honeymoon. It’s got to be memorable!
Giddy as only a couple of near-newlyweds could be, they strike a great deal with a travel agent — no dudes, this is 2000; there’s no Kayak, no Skyscanner and barely a TripAdvisor — and proceed to book the trip of a lifetime.
And go completely broke doing it.
No, I’m not kidding. By the time our intrepid newlyweds get back to work, they are long on bedspreads and tea sets, but desperately short on cash. Their entire savings are gone.
How did this happen?
Well, mostly because young Amit’s lofty dreams outstripped his actual savings. But also because of where he had kept all of his money — in his savings account, where it had no chance to grow.
Now, don’t get me wrong. Saving something is always better than saving nothing, even if you keep it under your mattress. But if you’re saving anyway, why not keep your money in something that handily outpaces inflation?
With money building in a savings account you may feel you’re getting richer, but you are actually getting poorer.
What do I mean by that?
Let’s do the math
Let’s say you’ve saved $10,000, and your retirement is a good 20 years away. Let’s also assume for a glorious second that you live in a country where prices never rise and everything stays as it is forever (this isn’t always a good thing, but that’s a different topic) so what you earn as interest is going fully towards increasing your purchasing power.
In such a world, even if you keep all your money under a mattress, after 20 years you’d still be able to buy exactly $10,000 worth of goods because prices have stayed the same the entire time. And, a savings account would actually be a pretty good bet, growing your money to the point where you can buy 34% more than you could today. Yay!
But, in reality, prices are always increasing. This is called inflation. Let’s say in the real world they typically increase by 2% every year.
Just this one change completely changes the picture. Your investments now have to overcome the headwinds of price increase, meaning that anything earning less than 2% a year is actually reducing the value of your money over time. You are getting poorer, not richer, even if the numbers on your statement look great.
The lesson — save in higher yield instruments
Try to put more of your money into higher-returning investments so you don’t win just in the reality show of numbers, but in actual, inflation-adjusted reality.
Yes, this advice comes with a lot of caveats. Higher returns typically involve a level of risk or volatility that’s not an appropriate choice in all circumstances. However, at its core, this advice is always, always relevant.
Put your money where, on average, it will earn more than inflation. Period.
Resources
- Money Tok Worksheet 3: Calculate how much you’d have in real terms if you saved a percentage of your salary every month
- Money Tok Worksheet 4: Calculate the future value of your current savings
If you prefer to listen rather than read, do follow Money Tok on Apple, Google or Spotify or via our RSS feed. Or just get bite-sized highlights on our Instagram
— -
Note: I am not a licensed financial advisor. Please use any advice, tips, tools and other material as guidelines only and seek help from a certified financial planner before taking any action
