Why should we save and invest our hard-earned money?
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by elmads
Saving Money
Saving money has been a part of our society, the reasons for saving may vary from person to person, this can be for a trip with family in a beach, amusement park, travel to countries that they have not yet set foot into, or buying their first car and home.
Saving money has always been the backbone of accumulating wealth overtime. It is usually taught by our parents, they told us to save a part of our allowance or salary for things that we want or need, for our future purchases. They said that saving is fundamental and the easiest way to grow our wealth, while this holds true, I still cannot help to ask myself if saving money is just for that specific reason.
People tend to always correlate saving money as a physical aspect of life, but I have another perspective. Preserving money is a method of controlling our life in order to shape our own future. We exercise the psychological behaviour of delayed gratification and prioritization.
“The ability to discipline yourself to delay gratification in the short term in order to enjoy greater rewards in the long term, is the indispensable prerequisite for success.”
-Brian Tracy, Canadian American motivational public speaker & self-development author.
The power of delayed gratification will be embedded into our human psyche once we practice it most of the time. We will always be consistently challenged on a daily basis with the opportunity to purchase an item, whether it will be as simple as a cup of coffee, for food or new fancy clothes, which if done repeatedly could amass into a substantial sum of money.
Nevertheless, if we make smart choices not to purchase products now for a certain goal in the future, this in turn will have a note-able and remarkable impact in our financial life.
You might ask how does delayed gratification and prioritization go hand in hand with saving money. Well, it boils down to the question what are you saving for and what are your future goals. Every individual who are successful savers have a common trait, which is they know what they want and what are their objectives. They achieve their endeavours by making step-by-step plans on how to acquire and prioritize their wants and needs.
Unfortunately, there will always be distractions to stray us away from our desired path of saving money. This is where delayed gratification comes in, it will test how determined we are to hold back all of our unimportant desires, in order to achieve a greater goal in our financial life.
To illustrate, My wife and I are saving for a house and a car. It is our top priority because a house acts as a security to our family and can be a long term asset due to house price appreciation,
while the car is for our comfortability, to bring and pick up our kids from school, go to appointments and holidays. Our family’s future goal is to live a frugal, fulfilled, simple and debt free life.
A person does not need to have a complex reason to save money, we only need to prioritize what we deem are the most essential things in our life. We need to look for the top 3 of the most significant goods or services we want to spend into; it can be for paying debts as soon as possible, a travel to another country, for retirement, and for education. Once we have made a decision, we immediately must start saving money for it. Just like in my example above, I focus my energy in those aspects and disregard short-term wants that I deem is not beneficial and needed for my family’s goals.
Furthermore, our priorities can change through time as we get older or as we achieve some of our aims. This is where having our own short, medium and long term objectives comes in. This will help us not to derail in our path to good saving habits and financial success. This is the beauty of saving money, we tremendously improve not only our financial wealth but our psychological health as well. This is because the more we spend with intent and awareness the more successful we are into controlling our lives, which can give us the fulfilment and enlightenment we always sought for. I always tell this to myself and others, that no one but us, is responsible for our own financial life.
Investing
After all that I have said and discussed about saving money, is there even a risk to just purely saving money? well, risk will always be a part of every aspect of our life and this applies with saving money as well.
The risk of saving money, is saving money itself. Sounds confusing? this is what I mean, saving ALL of our money in cash and cash equivalents such as Time Deposits and Savings Accounts in banks, are the death of our hard-earned money. This is because of the most popular word that people always hear but do not fully understand, which is “Inflation”.
It is the primary culprit why the buying power of our cash today will erode overtime, one of the simplest analogy is that the buying power of a £50 note today will just be able to buy, after a few years, what a £20 note can buy us today. Or, to give you more context, think of the amount of money you pay for your monthly groceries, then double that amount after 14 years (That’s if the inflation rate from today until forever is 5% per year). Below is a graph of how inflation affects the buying power of our money (in Great Britain Pounds)
A £100 of buying power in 1751 is now worth 0.45 pence in this day and age. It is very alarming to see what can happen to our hard-earned money overtime, it is expected that the value of £1(and other currencies as well) can decrease to 30 pence of buying power during our current lifetime.
Most of us get our savings from our salary, but what if our salary doesn’t go up at the same pace of inflation every year? which is actually what is happening to most employees worldwide. What do you think will happen with our saved money? Yes, you got it right, it will surely lose its value overtime. This certainly is alarming, it is an annoying fact that we need to live with it, this is why we must to find ways to handle inflation by ourselves.
On the other hand, Inflation is not yet the end of our money, there is always a solution for every problem and that solution is Investing. It is for our hard-earned money to generate more wealth in the long run.
Be that as it may, not all of our money must be invested because there are factors that we always need to consider, which is directly related to each and our own personal life circumstances. This is where saving money will still be paramount rather than investing. This includes saving money for our emergency fund and rainy day fund. As the fund states, we need liquid cash that is accessible in an instant when an emergency arises like, medical problems that needs hospitalization and also the possibility of losing our jobs. Always remember that safety & security will always be the top priority for us savers & investors above all else.
Saving money is accumulating our own money overtime, while Investing is generating more money from our own accumulated savings. It is a must to learn first the discipline of saving and allocating money before investing, as saving is the prerequisite of investing.
Some people try to start to invest first, even before they gain the rudimentary behaviour of saving money. And, this most of the time leads why most people, either lose their invested money or yes they make money, but it grows insignificantly. Just like what I have said about saving money in the 1st paragraph, it is us learning and practicing the skills of prioritization and delayed gratification.
These two are essential skills in investing as well, if not the most relevant for us to achieve a successful investing journey.
On the other hand, there are more individuals in this world who stay away from investing because of the negative stereotypes, such as the need to have a hefty amount of capital before investing, be knowledgeable about businesses and accounting, high IQ and many more. I assure you my dear readers, that these reasons are not 100% true and are pure fallacy. We only need the basic and simple knowledge about investing and a small sum of money for us to start and be comfortable with it. I’m a testament to this, a person who didn’t have enough salary and most especially a high enough IQ (My grades can confirm this to you. haha!)
How does investing supersede inflation? it is by capital appreciation/gains and dividends. The returns of investing differs for each investment vehicle, it is now easier than before to start investing, as there are smart phone brokerage applications where we can invest with just a click of our finger.
Stock market investing has an average return of 7–10% globally, but there are times in which investment returns will not overtake inflation due to several market factors like an economic recession.
Investing, same as Saving money should also have a goal in mind. Usually savers who invest some portion of their money do it for several purposes namely to fund their future retirement, education plan for their children or a home, which is all for long-term goals. It is highly advised to do it for the long haul of more than 10 years as the best return on investments takes time, it is when the magic of compounding interest builds-up, the longer we are in the game of investing the higher the returns we could get. As like what Albert Einstein quoted;
“Compound Interest is the eight wonder of the world. He who understands it, earns it, he who doesn’t, pays for it”.
-Albert Einstein
Below is a straightforward graph example of compound interest.
As you can see on the chart above, the Initial £100 capital from year one has skyrocketed to £600 over a span of 30 years (this is the average time horizon goal in investing), which is an increase of 6 times more than the initial capital and is compounded at a rate of 7% yearly.
This is certainly 100% achievable, as long as we have the right discipline and parameters in investing. I am confident that you will be on the side that will reap the benefits of compound interest, you are here for a reason, you are here to control your financial life and you are here to learn. The fact that you are taking actions in learning about financial literacy is one step forward in becoming what you always have dreamt for yourself and your family.
To Sum It Up
Saving money is a paramount step for reaching financial freedom, regardless of the amount of money that we can save. It is the behaviour of saving that we are learning and exercising here, as money is more of a behavioural problem rather than a mathematical problem. If we know how to control our money at 4 digits we will definitely know how to handle it when it reaches 7-10 digits. Never forget to focus on our goals in life, as it will dictate our saving, spending and investing habits in the long run. The person who controls their finances controls their life and are happy and thankful of it.
Knowledge is my Sword and Patience is my Shield,
Evan Louise Madriñan / elmads
This blog is for informational purposes only and not a Financial Recommendation. Not all information will be accurate. Consult an independent financial professional before making any major financial decisions.
1 Comment
Virgil Madrinan · 03/05/2024 at 7:59 pm
I read the whole narrative quickly. What sticks in my mind is this: A scared money makes no money.