Investing as a Norm: Why Saving Money is No Longer Enough

By Ryan Ong in Investments | Jan 10, 2012

 

What if I told you I’m going to eat as much as I can now, so I won’t have to eat next year? Yeah, stupid, and a good analogy for saving to get rich. There’s a huge difference between “rich” and just “not poor”. Investing makes you rich; saving keeps you from bankruptcy. Good financial sense is a balancing act between the two: not letting your money stagnate with savings, and not blowing it on bad investments. In this article, we dispel some common myths about savings:

 

When it comes to finance, size matters.

What’s the Difference Between Saving and Investing?

Savings minimize risk, while investments maximize growth. It’s the difference between getting $2 for every $1, or just burying your money under a rock.

Savings preserve liquidity, making sure you have access to your money when you need it. Investing, on the other hand, requires commitment; investing temporarily removes your money (or your access to it) in the process of growing it. That’s why between the two, savings provides more psychological comfort. Our lizard brains are conditioned to hoard money, like dogs burying bones, or cats hiding food in the sofa.

Another difference is the prospect of risk. Saving is a risk-resistant (nothing is truly ‘risk-free’) way of using money. But even the safest investments carry greater risk than saving. Investments are a calculated gamble: “lending” your money in the hopes of getting back more.

So despite the risk, why do investments beat savings?

Saving money huh. Smells fishy.

1. Possible Loss vs. Definite Loss

Investments are a possible loss. There’s a chance investing in your Uncle Cho’s Stainless Steel Schoolbag shop wasn’t the wisest move. And even if you do make money, it may not be as much as you planned.

That sounds like a raw deal, until you realize that stagnant savings mean a definite loss. The inflation rate in Singapore (2011) is pegged at 5.7% and growing. Most banks pay out an interest of 0.2%. If a $15 meal today ends up costing $24 in 10 years, then what happens to your savings?

Because the money in your savings isn’t growing with inflation, it’ll be worth less as time passes. In about 20 years, that $5,000 you’ve saved up might last you all of a month.Simply put, you may as well dig a hole and dump your money in it.

The bank's new savings account was DIY.

2. Wage Reliance

Savings are usually tied to wages. Most of us save X percentage of whatever we get. This creates a whole host of problems, because our wages aren’t as reliable as most of us assume.

Wages are subject to a lot of variables. Falling sick, collapsing companies, retrenchment, or just plain getting old. Singapore’s re-employment act, for example, allows for a pay cut (down to the median wage) for workers over 62. These constant shifts in wages impair the growth or even maintenance of our savings.

Investments, on the other hand, aren’t usually tied to our working life. If you’ve invested in a growth plan, that growth remains constant, even if you’re fired or retrenched. Investments are the independent, self-sustaining members of your financial family; savings are the whiny cry-babies that need constant feeding.

The slave proudly presents his ownership document.

3. Quality of Life

Save money: Don’t spend. Don’t buy that book. Don’t watch that movie. Don’t get new shoes.

The less you spend, the less you express yourself, the less you live your life, the more money you’ll save. It’s more depressing than a Good Charlotte concert in the dark. Obsessing over savings means constant budgeting and control. And because savings won’t make you richer, you’ll be doing that for the rest of your life.

Financial freedom isn’t just about security; it’s about being able to experience life without worry. Savings alone will never give you that, because the entire basis of saving is anxiety. It’s about preparing for emergencies. And without investments, you’ll never be free to leave the bomb shelter and first aid kit.

"…and I save $40 a month on aftershave. Next, I'm moving into a cave."

4. Saving Will Never Make You Rich

This should be common sense, but it eludes too many people.

If you save $5000, you get…$5000. Saving doesn’t actually raise your finances, it just preserves a portion of it. And no tycoons ever got rich by diligently saving X% of their income for Y years. At some point, all those savings must come into play. Unless those savings are tapped for an investment of some sort, they will never add money to your bank account.

Conclusion

I’m not suggesting you empty that bank account and blow it all on investments. Rather, I’m suggesting that part of what you put aside should be invested. Ideally, you should be saving 10% of your income, and investing the other 20%.

If you’re not sure how to invest, stick to fixed deposits or simple insurance growth schemes. The only risk in these schemes is that you’ll make less than you expect. Short of the bank collapsing, it’s very rare to actually lose money.