Saving is a losing financial strategy when done for the sake of it. Just putting money in the bank and banking on the interest paid on deposits to make you rich is not a viable wealth creation strategy.
Saving through bank deposits
Many people who lack financial and investment intelligence find saving as an easy way to hold the extra cents they have after catering for their expenses. They put money in the bank for years thinking that it will increase due to interest payments.
Ask yourself, why should the bank pay you for keeping your money safe? In real sense, you are supposed to pay the bank. The answer is, your savings are more beneficial to the bank more than to you. This is why they give you interest as an incentive to give them your money.
In real sense, the bank does not keep your money safe. After you give your hard-earned money to the bank, the bank only keeps a portion of it (The minimum legal reserve) safe and invests the rest. It uses your money to make more money.
After using your money to make more money, the bank will get back to you and give you a negligible percentage of their profit as interest.
I am not saying that depositing your money in the bank is not good, I am just saying that keeping it for the long term is not the best strategy for those who are serious about wealth creation. I also deposit money in the bank but I do not deposit it just for the sake of saving.
When you deposit money in the bank, someone else will come and borrow it. The bank will give you a 1-5% interest on your deposits annually at best.
The person who borrows the money and invests it prudently will make between 15-20% return on investment. They will pay the bank between 8-13% interest on the debt and keep the rest.
At this time, the amount may seem small. However, after they are done paying the loan, they get to keep the asset. Therefore, they will make a profit (ROI- The interest rate on the loan) and then keep the asset they bought with the loan. The asset will continue generating cash flow throughout its useful life.
Since wealth is created by accumulating income-generating assets and not cash, the borrower wins while the saver loses.
Saving through retirement schemes
Other people, especially the middle class, put money in retirement schemes. These schemes are highly publicized by the government because the government does not want anyone to be a burden after retirement. What the government does not tell us is that those schemes are just meant for survival and not wealth creation.
The other institution that advocates for retirement schemes is the investment company. After all, this is what they do. This is how they make money. They have to tell people to save.
Investment companies play an important role in the economy. This is because they move cash into projects with high returns. This is how an economy achieves efficiency in the allocation of capital.
Some investment companies generate high returns for their clients. However, many just rob them. They make money and keep it for themselves. The client goes home with nothing.
However, let us look at it this way; why do investment companies exist? The answer is simple. The main reason is that most people do not have investment knowledge. If everyone had knowledge of making their own investment decisions, we would not need investment companies.
Investment companies also exist to pull resources and invest in capital intensive projects. However, this is only good for the economy and not for you as a saver. Big projects rarely produce high ROI. On the contrary, small investment projects can produce as high as a 100% return on investment.
Look at it this way; a small business that you start with just 100,000 can give you 10,000 or more per month. For example, a grocery store, a motorbike, etc. 10,000 multiplied by 12 months, you get 120,000. In this case, the return on investment is 120%.
Now, consider a capital intensive real estate project. The best it can return is 5-12% per annum. Which one is better for you? It depends on your financial goals, financial position, and your stage in life.
For this reason, I recommend we all get financial intelligence so that we can make informed decisions that suit our financial interests. Without financial knowledge, you will only invest based on what the government, banker, and investment company tell you. What they tell you might be good for you but it might not be the best for your financial future. We have to move from good to best.
Storing wealth as cash/ cash equivalents
Wealthy people understand that storing wealth in cash or cash equivalents is risky. Cash equivalents include bank deposits, retirement schemes, etc. Cash is very volatile. Money loses value easily due to different factors.
Money is also not real. This is why we call it fiat currency. Fiat currency is only given purchasing power by the government of the day. Did you see how easily the government can declare money useless when the Central Bank of Kenya did away with the old notes? The old notes are now useless no matter how much of it you own.
Money is also affected by inflation. Inflation is also dependent on the policymakers in the government. If one incompetent policy maker makes mistakes, your money can lose its value in weeks.
You will have millions in cash but they can only buy a few commodities. However, by storing your wealth in real assets, you still gain when their prices are affected by inflation. In fact, inflation brings you more money.
Therefore, storing your wealth in papers called money is very risky. Money is only good for transactions not for the store of wealth. Do not judge yourself by how much cash you have but on the quality of your assets. Real assets are the real determinants of how wealthy you are.
Why savers are losers
1. The power of inflation.
As we have pointed out, when the prices of goods rise (As they always do), money loses its purchasing power. Investors, on the other hand, make more money.
2. Reduced interest rates on deposits
Nowadays, banks pay almost nothing as interest on deposits. You cannot get wealthy by depending on it.
3. Increased bank charges
Banks charge us for keeping our money in the bank. Leave alone for transactions. I pay money every month for putting money in the bank. This is not right because the bank is using my money to make more money. If they were just putting my money safe in the bank, it would be somehow fair to charge me every month.
As bank charges increase, they eat away your savings.
4. Opportunity cost
Opportunity cost refers to the cost of the foregone alternative. When you put money in the bank, you are losing money that you could have made if you invested it in a project with a high ROI. This is something that many people do not consider.
Instead of putting money in a savings account, put it in an investment project that gives you real returns.
When to save
This does not mean that saving is bad completely. There are instances when saving is the best idea. These instances are:
1. When you are accumulating money to invest
Saving to accumulate enough to invest is a good idea. Wealthy people also do this. However, if the money is enough to invest in a small project, do it as you aim for the big project. Use the income from the small project to fund your big project.
2. When you have achieved your life financial goals
After you achieve your financial goals, you can opt to save and relax or retire. However, there are also better projects to store your wealth like real estate.
3. When you are unable to manage an investment
When you are old enough or unable to manage an investment project, the best thing is to save money in the bank.
4. When you need to borrow
If you want to borrow from the bank in the future, you have to keep depositing money. However, you have to deposit and withdraw. Banks love people who transact often because they charge for the transactions.
Final thoughts on saving
In a nutshell, save only when it is necessary. Saving is not an investment strategy but it is still important. Save to invest. If you save just to save, you lose.
Founder/ C.E.O- Wealthy Wolves Consulting & Giimark Ltd/ Best-selling Author/ Speaker.