Why saving money isn’t enough
As a financial adviser I’ve often encountered suggestions that the difference between being financially successful and not is your ability to save. While in part this may be true, it definitely isn’t the whole story and in fact the pure idea of saving money actually isn’t enough.
Being a great saver will benefit you and certainly enable you to have choices, it’s a far better approach than spending every cent you ear. However if you are a great saver and that is where your financial understanding stops then in the balance of time this great skill unfortunately will not pay off for you.
Many great savers, while good with money are woefully inadequate in understanding money. And in this article I want to show you why. Being a good saver might put you in the position where you have a lot of cash now. But the issue is that over time the value of your cash is constantly being eroded via the remarkably destructive power of inflation.
There is a solution to this problem though – investing. Investing is very similar to saving, the key difference with investing is that you are placing your money into a manner where it can work for you, rather than allowing inflation to work against you. The key is to have your money “invested” in things that increase in value over time, of which money is not one of them.
Investing in things that go up in value may mean enduring some volatility as these types of assets can go up and down in value. However investing vs saving money is the only proven way to see your hard saved dollars beat the eroding power of inflation.
It’s a conversation I have with many pre-retirees – “I’m often asked the question about whether we should look to sell all the investments now and move to something safer” – they mean cash. However after a little bit of demonstration and coaching I’m glad most realise how unsafe an idea this actually is.
Right now you are probably asking what are these inflation beating investments:
- Shares in businesses
- Real Estate
- Commodities – Gold and Oil are too common ones.