All of the “get rich” advice in the world revolves around saving your money. The problem with such advice is that they often miss the fact that saving money will only increase your chances of getting rich through other platforms, using your savings appropriately.
To build wealth, you must first think of ways to grow your savings faster than the rate of inflation. Read on to find out why having a golden egg isn’t as good as having a golden egg hen:
1. It does not fight inflation
Although the terms “saving” and “investing” are often used interchangeably, they do not mean the same thing.
Saving, by definition, involves the preservation of money from physical loss. The methods involve storing your hard-earned savings in a fixed deposit or under your grandfather’s pillow.
Investing, on the other hand, involves taking some of your money and buying things that could go up in value, like stocks, property, bonds, or trust units, with the goal of protecting your money from losing its value, and also to make your money grow.
While saving money is a good habit, it doesn’t necessarily protect you from market conditions such as economic downturns or soaring inflation rates, which could cause the value of your savings to decline with the time. Saving money only creates opportunity, while investing is the only way to capitalize on that opportunity to potentially create wealth.
To beat inflation and maintain your current standard of living, you need to grow your money at or above current inflation rates in order to save enough for retirement.
Some ways to do this are to invest money in investments such as property, unit trusts, real estate investment trusts (REITs), and private pension plans (PRS).
2. It will take you longer to reach your goal
Most people have the same financial goals: to live a financially comfortable life, provide for loved ones, and have a stable retirement income during their golden years. To achieve this, certain short-term and long-term financial goals must be met.
Living paycheck to pay check doesn’t help, and hoarding money aimlessly won’t get you far. Investing can help you systematically plan for these goals, without investing all your money in savings.
However, everyone has a different investor profile with different goals and needs. Security of capital, income range, age and holding power are factors to consider when choosing the type of investment in which to put your money.
If you’re 55 and nearing retirement and hoping to stretch your retirement fund, you might want to play it safe and place more assets in lower-risk investments, such as mutual funds. or savings bonds.
However, if you are 25 and saving for your first home, your wedding and also your retirement fund, you can afford to roll the dice a little more and put more of your money into high-risk investments like actions. Being young gives you a longer time horizon, allowing you to weather and weather the ups and downs of the market.
In the end, it’s always worth having a good reason to start something. Writing down your financial goals will help you get on track and stay on track.
3. It’s high risk
Not investing your money is riskier than when you do. By simply saving your money, you risk losing the value of your money due to inflation, and also losing the ability to grow that money.
It’s never wise to put all your eggs in one basket, or worse, to put all your eggs in a basket under your bed. Putting all your funds in a low-interest savings account is like hiding your money under your mattress.
If you put RM5,000 in a fixed deposit account with a rate of 3.75%, you will earn RM938 after five years. However, if you place the same amount in a unit trust with an average rate of 5%, you will earn approximately RM1,381.41 at the end of the same period.
Investing allows you to diversify your funds to mitigate risk. Investors are always encouraged to spread their investments across different asset classes such as stocks, mutual funds, bonds, industries, and even geography. Asset allocations should be reviewed periodically as investors go through different life stages and the time horizon shortens.
The objective is to obtain maximum return by investing in different areas which would each react differently to the same events. Although diversifying your investment portfolio does not guarantee losses, it is an important part of achieving your long-term financial goals while minimizing risk.
What many people still don’t know is that you don’t need a lot of capital to start investing. Nowadays, with just RM1,000, you can claim hundreds of businesses and residential apartments, commercial buildings and malls through ETFs and REITs.
4. It does not give high yields
Saving money, even if you put your funds in a fixed deposit account, does not give you a high rate of return. Currently, the highest interest rate offered for fixed deposits is 4.15%, just enough to protect your funds against rising inflation.
However, with investments, you can choose the rates you are comfortable with, depending on your risk appetite. With the power of compound interest, starting early can make all the difference. The earlier you start, the more time your investment has to accumulate returns.
Instead of spouting rhetoric like saving is a good habit or saving for a rainy day, what your parents really should have told you was: an investment of RM1,000 today, at an average rate of return of 10 % per year, will magically turn into RM1,465 in five years – that’s over 46% ROI!
No investment strategy can guarantee foolproof success, but at least the likelihood of reaching your goal is much better than just saving your money. Each investment vehicle has its own characteristics and risks, and is subject to volatile market conditions. However, over the long term, these pips should smooth out into an overall upward trajectory and produce substantial financial returns for the investor.
This article was first published on November 26, 2014 and has been updated for freshness, accuracy and completeness.
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