Ever since we were little, we were taught to save. Whether it was putting the pocket change into piggy-banks or saving up for a new backpack, saving was a neat way to teach us the value of money.
But what is the real value of money? Does the concept of saving work in the long-term? Can saving actually make you lose money?
In this article, we shall go in depth to understand what the concept of saving is and how it has changed over the years.
Ever since the concept of money was introduced, people began holding onto it, to be able to use it in the future. It became a game, eventually. Lending, borrowing, and charging interests became a business. The ones who could successfully save in order to lend, seemed to gain a higher status in the society.
Then came the dawn of banking. One place where people could keep their money, and in return get paid interest on it. The way banks were marketed was quite magnificent – safety! They guaranteed the safety of money, and in return paid an interest on the sum deposited. With the pool of money deposited by various people, banks lent to people who required loans. And of course, banks charged an interest on this (after all, it was a business, not charity). The interest that banks charged to borrowers, was significantly higher than the interest it paid out to the depositors. This is still the case today.
But is it really smart to save?
When we save money and deposit it in a savings account, the money is just sitting there. Safe, yes, in a way that you will not spend it in cash. But it’s not growing – neither in amount, nor value. In fact, the value depreciates over time.
READ THAT AGAIN!
Yes, the value of the money in a savings account is depreciating. The value of money today is not what it will be in a year. Saving accounts are not adjusted for inflation. So, the power of purchasing will diminish with time.
In simple terms, if you can buy 1 barrel of oil with $100 today, the same will not be the case in five years.
The average rate of interest that banks pay depositors is roughly 0.5% around the world. Whereas the average rate of inflation is 1.5%. This means, the rate of inflation is 3 times the rate of interest paid out by banks. So it is safe to say that the value of money is depreciating if it is sitting idle in a saving account.
Alternatives to saving
Just because saving in the traditional manner is not wise in today’s age, does not mean you should not save at all. But there are smarter ways to do it. There are several instruments that one can invest in, and grow money, while boosting savings. Some of them are listed below:
- Index Funds: Investing in Index Funds is one of the best ways to start. Since it is a pool of top performing companies in that index, the returns are going to be balanced for performance. A large number of beginners opt for Index Funds, because of the hassle-free nature of investment.
- Stocks: For those who have time to do some market research, it is better to read up on individual companies, track performance, and invest in the company stocks. When done with care and research, it can pay dividends, that will easily compensate for the rise in inflation. Do your study and understand the difference between dividend stocks and general stocks.
- Deposit Certificates: An excellent option if you are looking at long-term investments. Deposit Certificates give better interest rates than saving accounts and hence can prove to be a crafty option if you decide to hold onto the money over a long period.
- Real Estate: A very popular option when compared to alternatives to saving money. Purchasing property to rent or to flip it after a rise in market, can be a great investment, and an excellent way to generate money, on the side. Though it requires a lot more patience than investing in the methods mentioned above, it is surely more lucrative and rewarding.
Always invest in what you understand. If you are unclear about any of the alternatives to saving, DO YOUR RESEARCH.
Read Smart Investment Tips for New Investors here.
Choose options that fit your current budget and fit your lifestyle. Do not try to go extravagant by borrowing to invest. This will only burden you and impact your savings.
Short-Term v/s Long-Term Saving
Not all saving is bad. It all comes down to the time period. How long you save for, depends on what you need it for, and how immediate is the intended use of the money.
Saving for longer periods will diminish the value of the money, as discussed above. Inflation will lower the value of the currency and its purchasing power, thus reducing the value it held when you deposited it.
But, saving for a short-term can be smart. Keeping a certain portion of your earning aside, could serve as an emergency fund, or money saved specifically towards a target (buy something you really wanted, or for the vacation you have been planning, or a gift for your loved ones).
The whole concept of saving was not wrong, fundamentally. But it was never adjusted for inflation and the surge in prices over the decades. Thus, it is important to know the right ways to save (especially as a newbie). Read, learn, and understand your money before you put it into anything.
It’s YOUR money. You do not need to follow what ‘others’ do. What works for them, may not for you. And vice versa. Choose your options and feel free to switch them up when you feel you know more.
What is your take on saving? Or would you rather invest?
Let us know in the comments below.