Just saving won’t make you wealthy

Grayson Rainier, Marketing Manager, M&G Investments

Saving is good. Saving is useful. But simply putting your money in a bank account won’t make you wealthy. It helps you in emergencies, protects you from irresponsible spending, and lets you sleep peacefully at night knowing your money is safe.  It also lets you slowly accumulate money to buy things you want.

However, it’s unlikely that your money will grow significantly over time just sitting in the bank. That’s because the interest rates on savings accounts are typically lower than those offered by investments like unit trusts. And while it’s true that interest rates have been rising, the investors who are most able to benefit from favourable interest rates on bank deposits are typically those with a substantial lump sum of money to invest, and who can afford for it to be inaccessible for a long period of time, even if an unexpected personal emergency arises.

Inflation reduces the value of savings

One of the overlooked drawbacks of saving your money – whether it’s in a bank account or stashed away in a sock under your bed – is that inflation will make the value of your savings depreciate over time. It’s inevitable, particularly in the current environment of high inflation: the costs of products and services will rise, but your money will effectively sit gathering dust. The interest you’ll earn in a savings account at a bank may not even beat the rate of inflation. As your future expenses become more costly, your money will steadily be worth less and less.

If you want to preserve your savings and build wealth, you’ll need to make your money work harder. That means investing, putting your money into unit trusts that will enable it to increase faster in value than inflation. To become wealthy, you have to know how to multiply money — which is what investing does for you. If you take a look at the lives of the wealthiest people in the world, you will see that they didn’t get wealthy by saving money in the bank; they invested in businesses and asset classes that multiplied their money over time.

Have a goal

Putting money aside is always easier when you have a purpose in mind.  However, you can choose how you want to reach your goals. To use a sports analogy, think of cricket or soccer when you draw up your financial game plan. You could play cautiously, with low-risk shots and a packed midfield; or you could go on the attack, smashing the loose deliveries to the boundary and not being afraid to take calculated risks. Of course, the more aggressively you play the more susceptible you are to counterattacks. Speak to your financial adviser and determine your risk profile and the most appropriate investment strategy for your needs and investment horizon (the time when you’ll need to access your investment).

Either way, successful investing is about compounding real growth (i.e., grow that outperforms inflation) at high returns over time. That is the best way to become wealthy and achieve your financial aspirations.

Many people are scared to invest because they don’t want to lose money, but with proper risk management and investment diversification, you can minimise your losses and maximise your profits. Rather than keep all your money in the bank, start learning how to invest properly today and your future self will thank you for it.