Why saving money actually costs you over time

April 25, 2020

Saving money costs you? How is that even possible you ask? Read on with an open mind to find out.

Saving money is important, but there is a difference between an emergency fund and saving money because we fear losing it.

Two rules someone who knew a little about investing said;

Rule 1: Do not lose money
Rule 2: Do not forget Rule 1

Mr. W. Buffet

Paying yourself

If you’re an individual with a lot of savings, I have a lot of respect for you. That’s because you’ve understood the importance of paying yourself. A lot of people forget that when you get a payslip, it’s a reflection of your organisation paying you for your time.

From that payslip, how much do you pay yourself for your time and effort? 

Regardless of what you’re earning, I think you should always set yourself a minimum of 10% from your pay to be put away as savings. This needs to be applied immediately if you want your financial vision to line up with reality.

Saving money is a very responsible thing to do, if you start this habit at a young age you generally end up in a good place financially. However, what will actually set you up for success is what you do with your savings! What you do with it decides how you live your life in the future. Whether you scrape by or live comfortably. 

The invisible enemy

If the bulk of your money is going into a savings account, where you’re accumulating your cash, you’re actually losing an enormous sum of money in the long run. The reason you’re losing money is due to the invisible enemy.

No, not COVID-19 but the other deadly killer known as inflation. What is inflation? Put simply, inflation is the increase in prices of things and decrease in what your money can actually buy you. Ever heard your grandparents say how much bread, milk and eggs cost them in the past, and how ridiculous prices are today? Yup, that’s the invisible enemy.

Eggs as an analogy

Let’s compare $10 in the ’70s and $10 today in Melbourne. Let’s compare the purchasing power of a $10 note by looking at buying a dozen eggs.

In the ’70s a carton of 12 eggs cost $0.59 cents. $10 would buy you 16 cartons and you’d still have some change in hand. 

Today, if you walked into Coles or Woolies, the same $10 will only buy you 2 cartons because a carton costs $4.70. That’s eggspensive!

This shows how the purchasing power of $10 reduced from 16 cartons to 2 cartons over the decades. This trend will continue into the future and we will be telling our grandkids how making eggs for breakfast today costs a fortune. 

If that’s what inflation does to your eggs, imagine what it does to your savings.

Inflation & Interest

The annual rate of inflation is 3% per year. Therefore, it is shocking to see the average rate of interest for a typical savings account in Australia was only around 0.75% at the time of writing. This is more than three times less than the rate of inflation.

Effectively, we are faced with a unique situation where our savings, our hard-earned dollars, are losing their purchasing power and weakening as inflation eats away at it over time. As Muslims, this is amplified because we wouldn’t put money into interest-earning accounts!

You can probably wrap your head around the concept now. When you save money, over time it decreases in value and purchasing power. Wouldn’t you rather it work for you and increase in value? Despite knowing this as a concept, people continue to invest the traditional, interest-earning, safe-in-their eyes, way.

The fear of losing money

An important question to ask is, why do people rely on savings even if they know it to be an ineffective way to grow wealth?

The root cause is fear. People are afraid of losing money. 

If you really think about it, not investing your money because you’re afraid of losing it is the same as saving your cash and losing its purchasing power due to inflation.

If you think you’re avoiding risk by saving your money, you will lose in the long run. I repeat, the lost opportunity that comes with saving money is the same as the money lost due to inflation. You are missing out on putting your money to work for you, by investing and growing your wealth. 

What do you think the banks are doing with your savings anyway? They are investing it and saving the profit for themselves. The banking and lending industry did not become the behemoths they are today by equalising the playing field or helping the common person. They lend you peanuts and charge you an arm and a leg when they take it back. 

Money invested makes money grow

Ever heard the phrase ‘You need money to make money’? 

Let me expand that a little further; you need to spend money to make money. 

If you use money to buy something, then sell that something for a profit, congrats, you just ‘made’ money make more money. Better than money sitting somewhere, not working, and deteriorating due to inflation.

This is the BIGGEST reason why investing in the stock market, regardless of its ups and downs, for the long term, gives you one of the best opportunities to grow your wealth. 

Investing in the stock market, the Tabarruk way, helps your money make more money and benefit from the power of compounding.

Hopefully, you now agree with me, that saving money actually costs you. 

How do you start saving and investing? Head over to our article, 3 steps to start investing? Generally speaking, I think people should focus on having a 3-6 months emergency fund in savings, and once you have put aside that, then enter the world of investing.

I’ll leave you with another quote from someone I should’ve listened to more often.

Before investing, learn how to save. If you don’t know how to save money you can’t learn how to invest it. Both these disciplines require discipline.

My dear father

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