[pullquote]How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.–Robert G. Allen[/pullquote]
If your growing-up was like mine, your parents probably would have drummed it into your ears, especially on getting your first job after finishing college that you must save. But they failed to teach you how to save money. Neither did the schools we attended. Truth is you cannot get rich by simply saving money.
If you followed that well intended financial advice your parents had given you freely, the first thing you probably did was to open a savings account in a bank and conscientiously put aside some money out of your salary into that account on a monthly basis. But how much were you able to save after say, two years? Like many people, you probably did not continue your saving programme. Why? You did not know how to grow money! Perhaps, your living expenses increased, your responsibilities expanded, emergencies occurred along the line or you changed jobs that paid you less, etcetera; etcetera.
So your saving programme got disrupted. Right?
Honestly, saving money is not bad at all. Cultivating a saving culture is a good money management habit. It gives you a head start, makes you disciplined and most importantly, allows you to accumulate seed money to do quite a good number of things. When you have some money put aside you have a feeling of security that there is something to fall back on in the occurrence of unplanned events like job loss and some other emergencies.
A standard principle in personal finance is that you must endeavour to have at least the equivalent of six months living expenses set aside at all times to take care of unexpected loss of income due to retrenchment, retirement, termination or forced exit from a job or loss of business. These are some of the benefits of saving.
But simply putting your money in a savings account cannot make you rich; understanding how to manage money, how it works, how to grow it and applying the principles is what will make you rich.
Now these are the reasons you are not getting rich even though you have been saving money since you left college:
#1 Low returns on Savings Account – Savings account attracts interest unlike other demand deposit products offered by the banks, like current account. But the interest on savings account is very low. At 3 per cent per annum, interest is hardly a motivator except for the safety of your money that bank account offers.
#2 Negative Impact of Inflation on Savings – Inflation erodes value of money in your savings account. The illusion many have is to think that an absolute increase in the quantity of money in their possession translate to the power that amount of money commands. The power your money commands is a direct function of the quantity of things you can use it to buy. What the money in your hand can buy at any point in time, is its true value.
Consider this scenario: you could afford to rent a studio apartment in your area of residence with NGN100,000 last year. This year your landlord has increased your rent to NGN150,000 because the prices of things have gone up, you discovered that your hundred thousand Naira can only get you a one room apartment in an area less developed than where you presently live.
If you had saved up that money in a savings account that pays you 3 – 5% per annum interest in the last one year, you will discover that even with NGN103,000 or NGN105,000 you are not able to pay your rent. To maintain the standard you are known for you will likely have to take an accommodation loan from your employers or borrow from friends and family members against your next salary. That is the impact of inflation on the value of money.
To beat the negative impact of inflation, your best bet is to put your money in an instrument that gives you above inflation return. That instrument is not a savings account.
#3 No one has ever become a billionaire, a millionaire or even an averagely wealthy person through saving. Take some time to study the lives of rich people the world over from Bill Gates to Warren Buffet, Carlos Slim to Sergi Brian or Nigeria’s own billionaires like Aliko Dangote, Mike Adenuga, Femi Otedola and a host of others not in the public eyes, you will found that none of them would attribute their wealth to a fool proof saving programme that spanned decades.
#4 It is not always safe. Yes, leaving your money with the banks offer a level of safety but it is not always safe. There have been cases of bank failure. In the 90’s, financial institutions (banks and finance houses) collapsed in Nigeria. In 2005 some banks also failed due to the consolidation policy of the CBN. Again in 2010 some banks failed due to review of the universal banking model. Each time a bank fails, people lose money. Customers’ deposits are insured by the NDIC but the coverage is so low as to provide much comfort to a depositor with large funds.
#5 The impact of emergency needs. Life events do not happen on a straight line, sometimes things do happen that were not planned – death of a loved one, loss of means of income, fire, accident that could leave one paralyzed, burglary and all sorts of mishaps do happen unexpectedly.
No one budget for these things but they do occur. When they occur, you will have no option than to recourse to whatever you have saved to meet that emergency needs irrespective of whatever your original purpose for saving was. You will have a relief that there was at least some means available to you to solve the problems at hand but that event may have taken you several steps backwards to achieving your financial goals. You may have to start afresh.
#6 Saving regularly requires a high degree of discipline. Not many people are able to cultivate that level of discipline to keep to an established saving plan. There are intervening variables that may crop up to always provide a credible excuse to stop halt the saving programme you have established.
#7 Strict adherence to a saving programme may make one become paranoid, miserly and stricken with poverty mentality. You deny yourself of the most basic thing to live on; you become isolated from people and even fail to see opportunity where there is one because you are fixated.
This may have described an extreme psychological state of mind but the truth is that people with these tendencies abound all around us. Do not be quick to mistake poverty mentality or miserly living with prudence. A prudent man spends wisely and miserly man suffers in self punishment. Another way of saying that a prudent man knows the right way to save money but miserly man don’t.
#8 Those who have reached that level of paranoid in saving habit become risk averse, are reluctant or out rightly repulsive to take advantage opportunities simply because they believe investing in other opportunities will reduce the quantum of cash at hand.
They prefer to ‘see’ their money rather than convert it to a more paying asset. They become slave to money, working for their money rather than have their money work for them. This is not how to save oney. When you work for your money, your money does not multiply quickly but when your money works for you, the rate of growth is rapid.
If saving cannot make one rich, what can? My answer will be good money habit, investing and business.
A good money habit will mean that you spend less than you earn, keep a little in an emergency fund, spend on budget and invest in an income yielding assets regularly. Rather than keep all that money you want to save in a savings account that pays you 3% interest per annum, why not put out a quarter in the account as an emergency fund, invest a third in stocks, for instance. Ensuring that the money you put aside bear more money is the true definition of saving.
No matter how bad the economy is or how down the stock market is, investment in quality stocks overtime yield more and better returns than what you have in your bank deposits.
Fortunately, you do not require a tone of money to begin. Identify a quality stock and have a goal to invest certain amount on a monthly basis. In the course of a year, you will see you have acquired some volume and within that period, the price must have appreciated and you would have earned some dividend.
Stock is liquid which means that you can exit at any time to take advantage of other opportunities. In the scenario we painted at the beginning of this post, if the hypothetical man had put his money in a quality stock, he would have discovered that he only needed to sell off some quantities to meet his rent obligations because over the cause of the year, the investment in stock must have appreciated above the rate of inflation.
Quality stock is the share of a company that has sound fundamental, one that does not fall to the vagaries of the market, one that is not speculative and one that pays regular dividend.
If you do not have one already, identify a stockbroker and open a stock account today.
After you have accumulated some funds through investing in the stock market, you are set to realize some of your gains, then invest in a business of your choice or buy piece of real estates. This is how true wealth is created. Wealth that keeps multiplying even while you sleep.
Good luck.
Do you know of a better way to save money? Please share your thoughts.
Buchi creates content and leads the Team at Stalwart Investment Partners; a business development and investment consultancy firm. He provides strategic advisory to help SME's, small business owners and HNI's grow profitable business and make informed investing decisions.
