Why A Savings Account Might Cause You More Harm Than Good

Saving money is great sometimes, but investing is always a better alternative

You would have probably seen photos on Facebook at one point or the other, of people who saved money under their beds and ended up with nothing.

When Nigeria moved from the large paper currency notes to the more sophisticated, smaller-sized polymer notes, people were required to change the monies they had within a specific deadline.

After that deadline, many videos and photos surfaced the internet where people were lamenting about their losses as they had not been able to swap their old currency notes for the new ones.

Up until last year, news headlines like __“Man finds old Naira notes that grandfather forgot in the house”__ still surfaced, and we could only offer our condolences.

Saving money is something we all strive to do. In fact, whether we like it or not, we are reminded of the need to do so by our friends, parents, books, mentors, and so on.

“Save.” “Set aside a portion of your income.” “Part of what I earn is mine to keep.” “Delayed gratification is key.” “Spend what is left after saving”

We have heard them all. Indeed, saving is a necessity. Afterall, it is the first step to building wealth and represents the seed with which you invest.

But, if you too had lost money out of your desire to save, then you would probably have wished that you just spent the money anyway. While saving is good, the truth is that it, by itself, can cause you more harm than good.

The primary reason is the impact inflation has on the value of your money. Inflation is simply the sustained increase in the general price level of goods and services in an economy over a period.

If you are young, your parents would have told you that in their time, a tin of milk that now goes for N200, used to be 10 Kobo. What this means is that if you had saved your money for the last twenty years somewhere it doesn’t earn interest, then the value of what the money can buy would have diminished significantly.

A savings account on the other hand, would offer you shield as it earns interest when left untouched. However, the sad truth is that your savings account only shields you to an extent from the diminishing effect of the time value of money. In order for your money to be worth the exact amount it was when you saved it up, it needs to increase by at least the same rate of inflation annually.

For example, if you had N50,000 in 2017 and you want it to be able to buy the same worth of items in 2018, the interest received must be enough to net off the inflation impact or your money will lose its buying power.

As such, on an inflation rate of 10%, your money should have risen to N55,000 to be able to buy the same worth of item. In Nigeria the average savings deposit rate in banks is 4.20% while inflation is at 11.28%.

This means for the regular Kojo who is saving his funds in the bank to buy a Mercedes Benz next year, the real value of his money would be worth over 7% less than it is now.

So, while saving money in the bank can offer you liquidity, safety, and serve as a buffer for contingencies, a savings account would typically earn less over a period than the cost of inflation.

This is why investment is gold! Investing is the sure way to create wealth in the long term and you would just need to take a little risk to avoid losing a lot of money over time. Investing doesn’t just help you maintain the same value of money you had, it exists to multiply your funds.

A lot of people erroneously believe they need to have so much money saved before they can invest, so they keep their funds idle. It almost never ends well.

Don’t sit on your money; make it work for you. If your goal is to build wealth, then tying your money down would be a mistake in the long run. How do you invest when you’re clueless, read the next post!

[Article by Lawretta Egba]