There are good reasons to save your money but excessive saving will cost you.
Personal finance experts (and our parents!) say that you should save your money to finance your retirement, leave a financial legacy and get a greater sense of financial freedom.
Is this good financial advice?
In part, yes.
If you have no savings, saving some of your money is a good idea.
However, saving too much money is not.
In fact, excessive saving will actually cost you money.
There are 2 good reasons to save money
- To create an emergency fund.
- To finance short term projects.
An emergency fund is a savings account with sufficient funds to cover unexpected expenses incurred by job loss, a serious medical condition or a car breakdown. It is recommended to have an emergency fund with 6 months worth of living expenses. This money should be kept in a high interest savings account, preferably one that does not penalize you for withdrawing money when you need it.
It is also important to have some savings to finance short term projects such as going on vacation, buying a new car or making a down payment on a real estate purchase. This money should also be readily accessible and placed on high interest savings account.
Once you have enough savings to cover these two scenarios, there is strictly no point in saving more.
Piling money on a savings account will not allow you to generate wealth or become financially independent.
On the contrary: it will cost you money!
Why Saving Your Money is a Loser’s Game
There is one main reason why saving your money is a loser’s game: inflation.
Inflation is the “decline of purchasing power of a given currency over time […] reflected in the increase of an average price level of a basket or selected goods and services in an economy over some period of time.“
This is arguably the single most important economic concept to fathom: every year, prices increase and your purchasing power decreases.
Here are two concrete examples that illustrate this phenomenon.
- The Price of Bread
U.S. Bureau of Labor Statistics data reveals that bread prices were 92.26% higher in 2021 versus 1997. On average, bread prices increased by 2.76% per year.
This means that $1 buys you 92% less bread than it did 14 years ago.
- Housing Prices
The Bureau’s data also reveals that housing prices were 801% higher in 2021 than 1967, which represents an average annual inflation rate of 4.16%.
If we were to study the prices of the vast majority of goods and services, we would find that virtually all of them increase year in year out.
However, there’s even worse news.
Did you know that official inflation rates are wrong?
Not only is inflation rampant, the official numbers don’t tell the whole story.
Government statistics claim that the average annual inflation rate has been 2% since 2000.
However, these numbers are inaccurate.
Official inflation numbers are kept low to hide the fact that our money is losing value every single year.
Independent studies show that real inflation is closer to 5% per year.
Some suggest it’s as high as 10% yearly.
This means that your money is losing at least 5% of its value every single year.
Thus, if you keep your money in the bank and collect 1% interest every year, you are actually losing 4% of purchasing power.
Since 1913, the U.S. dollar has lost more than 95% of its value.
What is the conclusion of all this?
You must INVEST your capital in assets that generate an average annual return that is superior to 5%.
Otherwise, you’re playing a loser’s game.
How can you generate above-inflation returns?
In case you thought things can’t get any worse, think again.
Recent data for reveals that official inflation is skyrocketing: it jumped to 5.4% in July 2021 from 1.4% in January 2021.
Since we know that real inflation is much higher than official inflation, you should definitely be worried.
Thus, you have no choice but to invest your money in some kind of appreciating asset.
You have two main options.
The first is to invest in the stock market.
Warren Buffet famously said that regularly investing in index funds allows the know-nothing investor to outperform the majority of investment professionals.
Here are some resources to get you started:
- Here’s Why You need to Invest in ETFs
- How to Start Dividend Investing
- 3 ETFs for Easy Dividend Investing
The second is to invest in real estate
Real Estate is arguably the second best way to generate wealth.
You can choose to invest in physical real estate or in REITs.
Here are some resources:
I hope this article motivates you to start investing your money.
Are you interested in learning more about money management?
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