Don’t Be Fooled: Saving Will NOT Make You Rich!
The old mindset was always – Saving will make you rich – I’m about to tell you — It really will NOT — and I’ll argue why. Now I know a lot of old school people will definitely raise hell on me for the following but at least hear me out. Half way through the article, I’ll go over what will make you rich.
This is how it goes – No saving < Saving < Investing. That’s really it! If you create a saving plan, where you put money in on a consistent basis, over a long period, you will amass a good fortune. Start early enough and you might see the affects of compounding interest by the time you are 50ish.
Compound interest will only get you so far
What does that mean? It means that compounding interest is not some magic, it’s a formula that is predefined and can be calculated to project your savings growth on a given period. Taking into account, number of years, interest rate, how much money you put into your saving and at what frequency. The formula for compound interest is
A = P (1 + r/n) ^ nt
For anyone curious and wants to actually know what these letters mean, here is a handy link for a basic calculator that will explain it and project your savings based on that formula. It also details an example where depositing $5000 into an account, with an 5% annual interest rate, compounded monthly for 10 years would have a value of $8,235.05.
So this sounds good what’s the problem?
There is no problem really as long as you can handle P, R, N, T and realize that there is a inherit LIMIT.
Investing Will Make You Rich
Ah there we go again, another one of those articles on investing. What about all those that lost everything during the recession? What about those BIG banks that WE – the average person who SAVED – had to bail out. Hey you are absolutely right, a ton of people lost money investing in the stock market and In real estate.
On a side note:
There is a great documentary that discusses this detail and what really happened behind the scenes that caused the 2008 recession. If you are really curious to understand it, watch it. I promise I’m not paid in anyway to promote it.
The recession trickled down to the average saving Joe
The truth is, the recession impacted big banks and A LOT of hard working people who saved and contributed to their 401K. People were laid off, lost their income, had to run down their savings and even had to deal with losing their houses due to foreclosure by the same banks that created this sh*t in the first place. Take a look at the image below
So how can you go on saying we should invest?
Lots of Greeks saw their saving frozen, pensions wiped out too
The recession in the US may have been severe but it was a whole different ball game in Greece. It wasn’t just big banks defaulting on their investments and trickling down to individuals. It was a whole economy collapsing. Banks were shut, assets and savings frozen, pensions cancelled and of course unemployment and inflation skyrocketed. The recession that hit Greece and continues to impact it today was extreme to say the least.
What’s my point?
What I’m trying to show that saving is probably more secure than investing but there is also a risk of losing it in certain circumstances. Whether it’s your countries economy collapsing or personal issues that cause you to draw down your saving,
Lets define what I mean by “investing”
When you say investing, people automatically think – stock market, mutual funds, bonds, hedge funds, real estate etc. – and of course all those are vehicles of investing but they are not the only options.
The act of committing money or capital to an endeavor with the expectation of obtaining an additional income or profit.
As you can see it’s really an action/concept rather than the actual vehicle of doing so. You can read more on the basics of investing: Investing 101 but here’s my message on this:
Invest In Yourself By Yourself
We also associate investing as something we need to delegate because of course we traditionally think we can’t manage our own portfolio and have no idea what a bond is.
With our new understanding of the definition of investing, we can change things. We can invest in ourselves, in many ways including but not limited to:
- Opening a small business, online or otherwise
- Managing our own portfolio of stocks, mutual funds etc
- Investing in close friends and their initiatives
- Furthering our education
What investing will do for you?
All of the above are investments with the potential of exponential growth opportunities that are just not possible with the limitations of compounding interest. At the very least, they will INCREASE that limit and therefore your chance of getting rich.
1. Save more – The two are NOT mutually exclusive
Just because we decide to invest, doesn’t mean we need to stop saving. The two can got hand-in-hand, and even complement each other.
Lots of hedge funds close out their positions when the market is down and let their cash companies und some interest
2. Investing is self-sustaining, saving requires continues nurturing
Let speculation work for you! Probably the best benefit is that investing is mostly self-sustaining. You commit capital or have created a business that after a certain point is able to give you a ROI (Return On Investment). Saving with the intention of getting rich, requires you to contineously contribute towards that goal. That means you need income and to get that income:
You need to trade your time for someone else’s money!
3. You will gain experience that is invaluable
Whether you invest in your own business or in your education, you will gain experience that is extremely important to your personal growth. So. It only did you potentially increase your chances of getting rich but got wiser in the process.
The Elite 1% got rich by Investing
In my last article — Don’t Work For Money, Let Money Work For You! — I looked at how you should let money work for you as thats one of the benefits vs saving. Lets take a look at a few examples of athletes like Michael Jordan, entertainers like Jay-Z and financial gurus like Warren Buffett using different investment vehicles to accumulate their wealth. Some invested directly through the stock markets, others through creating personal brands around their names or buying assets that would appreciate exponentially in value.
Michael Jordan: Net Worth US$750 million-$1 billion (2015)
Michael Jordan earns 80 Million a year (2013). That’s 10 years after he retired, Michael Jordan still makes $80 million. As mentioned in this article, ironically that’s more than he made in his WHOLE career as an NBA player. As a matter of fact, Kobe Bryant “only” earns 33+ million from NBA (though I’m sure he as well is leveraging his assets to generate more income). Mr. Jordan still manages to generate this much income thanks to a bevy of endorsement deals, with Nike royalties alone earning him $60 million per year.
Jay-Z: Net Worth US$510–520 million (2014)
Many entertainers are great examples of this concept. Take a look at — Jay-Z. Almongst many things, he co-founded the urban clothing brand Rocawear and in March 2007, sold the rights to the Rocawear brand to Iconix Brand Group, for $204 million. He is also a part-owner of the Brooklyn Nets NBA team, reportedly paid a whopping $4.5 million for his share. Then there is his investment in a real estate development venture called J Hotels which recently acquired a $66 million mid-block parcel in Chelsea, New York. Jay Z and his partners are contemplating constructing a high-end hotel or an art gallery building on the newly acquired site which has the potential to go up about twelve stories
Warren Buffett: Net Worth US$61 billion (2016)
My favorite example is Warren Buffett — the ‘Oracle of Omaha’ — the man who literally uses money to make money. I’m sure many of you know him, but for those that don’t, he’s currently the second richest man in the world (Though usually within the top 3 for decades), is referred to as “Oracle of Omaha”, and known for this value investing philosophy. Buffett uses his decades of experiences along with running Berkshire Hathaway, to stocks that are undervalued and invests in them for the long run. He’s able to generate income through stock appreciation and quarterly dividends.
What Do You Think?
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About me
I like to describe myself as a technologically savvy person whos able to leverage experience and a broad background to excel in a variety of roles. Although I have an engineering degree, I have been drawn to various other areas through sheer curiosity, and have developed a strong passion in them. I have dabbled around in the stock market, and currently work on making awesome apps. And I enjoy amongst many things technology especially the FinTech space, traveling, some good fitness.
