Saving money is considered a major building block of financial success. We’re frequently advised to cut expenses, budget diligently and put aside money for the future.
While saving is undoubtedly important for financial stability, savings alone does not guarantee true wealth or richness. Let’s dive into the reasons why just saving money may not lead to becoming rich and explore alternative approaches to building wealth that go beyond simple savings.
Paw Vej, COO of Financer.com, shares that inflation is the main culprit that eats away at your savings.
“When you put your money into a long-term savings account, the value of your money decreases over time due to inflation,” said Vej, adding that the problem with relying solely on savings is the interest earned is usually quite low and may not keep pace with inflation. “This means that even if you diligently save, the rising cost of goods and services erodes the purchasing power of your savings. For example, when I was saving for a house deposit, the increasing housing costs outpaced our savings, making it difficult to reach our goal.”
Small Amounts Are Easy To Spend
Vej made an intriguing observation that many of us can relate to: Do you ever find yourself hesitating when it comes to spending larger bills, such as $50 or $100, while readily parting with smaller bills or change for everyday purchases like coffee or snacks? Similarly, when your savings account holds only a small amount of money, it may not exhibit substantial growth, making it tempting to spend it at the first available opportunity.
According to Nate Nead from Invest.net, if you solely focus on savings, you might overlook alternative investment opportunities such as stocks or real estate, which have the potential to generate significantly higher returns. (We’ll get into that more later.)
The experts agree everyone should keep some money available for everyday spending and emergencies — according to Vej, the super-wealthy people he knows keep between 5% to 10% of their money liquid — but what should we do with the rest?
What To Do Instead
Invest, Invest, Invest
Vej shares that the key is to “make money while you sleep.” Thomas Maluck, an NFEC Certified financial education instructor out of Columbia, South Carolina, said interest rates for savers in the form of high-yield savings accounts and money market funds are good deals right now. He added that T-bills are offering nearly 7% return at the moment.
“In past decades, when interest rates rose high enough to draw money out of the market and into treasuries, the stock market rallied even further ahead,” Maluck shared. “For example, double-digit interest rates in the 70s led some mutual fund brokers to openly wonder why anyone would bother with stocks when they could get a certain healthy return in bonds, but even those bonds were left in the dust during subsequent bull runs in the stock market. The savers who didn’t venture into any investments were the most left behind to deal with inflation, and it’s happening again in today’s environment.”
Maluck said for individuals aiming to grow their wealth, it’s advisable to capitalize on low-risk treasuries and savings account rates. However, it is equally important to incorporate a diverse index fund like the S&P 500 or a total market fund. This way, savers can avoid being left behind during future market rallies and maximize their potential returns.
Additionally, Faris Khatib of Ideal Tax told GOBankingRates it’s a good idea to contribute aggressively to your 401(k). “Rather than a general savings account, a 401(k) is designed to grow in the long term and can be less daunting than investing in stocks,” he said. “This helps your money grow and will help your financial future.”
Take Advantage of New (and Old) Business Opportunities
Baruch Silvermann, the CEO of The Smart Investor, highlighted that it’s crucial to recognize that the amount you can save is limited by your income and expenses. Instead of relying solely on saving a fixed portion of your income, it’s smart to think of ways you can grow your current income. He suggests things such as securing a promotion at work, starting your own business, or beginning a side hustle. By actively seeking ways to enhance your income, you open up more opportunities to accumulate wealth.
Make Passive Income
Passive income refers to earning money without significant effort on your part, according to many of our experts. This can be accomplished through avenues such as investing in rental properties, participating in peer-to-peer lending platforms, or creating digital products that generate income without requiring continuous effort. By harnessing the power of passive income, you can significantly enhance your financial prospects.
To Build Wealth, Do All of the Above
“Ultimately, building real wealth requires taking a comprehensive approach and implementing a well-rounded strategy,” said Michael Collins, CFA of Endicott College in Beverly, Massachusetts. “It’s important to save your money, but you’ll also want to think beyond just saving in order to capitalize on the power of compounding and the many opportunities for accelerated wealth growth.”
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