Most people want to be rich. I mean who doesn’t want to be part of the jet-set crowd spending winters on warm, sunny beaches and summers in the mountains? As nice as it sounds, it just doesn’t happen for most people no matter how much money you save. So, maybe you’ve been wondering why just saving money will never make you rich. Well, here is the truth you’ve never been told.
Why Just Saving Money Will Never Make You Rich
The reason just saving money is not going to make you rich is due to two little factors, inflation, and compound interest.
A bank account is not a way to get rich.
The money you save will never compound into wealth unless you do something with it.
Your savings account does not make you an investor or a capitalist.
It makes you a depositor.
The interest you receive on a savings account or even a certificate of deposit (CD) is never high enough to outpace inflation.
Currently, most savings accounts pay less than one percent interest. Inflation hasn’t been too big of a factor in the past few years, but the inflation rate still runs over 2 percent.
That means the money you save today is worth less in the years to come. It is a hamster wheel that you can’t get off of and you will never catch up.
If you read books on personal finance, you’ll probably hear often about the importance of saving money.
Lots of people repeat mantras such as “pay yourself first,” “start saving early,” and “try not to live on credit.”
And these people are right.
You should pay yourself first, start saving early and avoid living on credit.
But that’s not the point.
The real objective is not to save money. It is to do something with that money that will make you more money.
And that’s where compound interest comes into play.
You might also enjoy:
So, How Do You Get Rich?
Compound interest is a powerful force.
It’s the key to early retirement.
In short, an increase in savings and investment returns multiplies itself over time with time and eventually allows you to retire very early in life.
Wealth is not something you earn.
Wealth is a result of what you do with what you earn.
The power of compound interest has benefited countless people, helping them reach their goals faster.
However, many people are still hesitant to throw their money into the stock market and hope that a substantial return will come with the passage of time.
It really breaks down like this…
Yes, you need to cut your spending so you have more disposable income.
That’s where all those books and websites about living a frugal life come into play.
But then, it becomes what you are going to do with that extra income?
If you plan on throwing it into a savings account like the majority of people, you won’t have the outcome you’ve been hoping for.
Instead, you will need to bite the bullet and put all of that money into investments.
It is true that the stock market has ups and downs and you can lose money, but that is where you are going to make the most out of the money you have.
The stock market has the best rate of return you will find.
Real estate investment has a good return as well.
While I am certainly not an investment broker, I do know that you need to look at investing as a long-term proposition.
You won’t make thousands of dollars overnight, but with compound interest and dividends, and stock splits, you can get rich over time.
Just think about all those people that bought Apple stock when it first came out. Many of them made millions and millions of dollars.
Where Do You Start
If you don’t have an emergency fund, then yes, you need to start one. Depending on who you talk to you need a minimum of three months worth of expenses saved and up to twelve months according to some.
Just pick an amount you’re comfortable with and go for it.
Once you have that money tucked away, it is time to start looking at stocks.
If you’re really nervous consider mutual funds as a starting step.
From there you need to grow your assets and dip your toe into the stock market or real estate investing.
Your best option is to talk to a licensed broker for advice.
They will be able to guide you when it comes to risks and your best options.
You might also enjoy:
Learn the Rule of 72
Something else you should be aware of is the Rule of 72.
Simply put, take the interest rate you are receiving and divide 72 by that rate. It will tell you how long it will take to double your money.
So, for example, if you’re getting 1 percent interest on your savings account, and you have $5,000 dollars in the account, it will take you 72 years to double it to $10,000.
On the other hand, if you have your $5,000 in an investment that earns you 10 percent interest, it will take you 7.2 years to double your money.
That’s the magic of compound interest.
Why Minimalist Living Will Never Make You Rich
Yes, you can save a few bucks by not going out to Starbucks for coffee every day. And it is true that if you spend less you can save more, but this will not make you rich.
A few dollars here and a few dollars there will make your life a bit less comfortable, but it will never add up to what it takes to be rich.
If you want true wealth, then you need to make as much money as you possibly can by either getting a raise, a better job, or adding a side gig.
Then take this money and invest it.
To Sum it All Up:
Saving money will never make you rich. You don’t receive enough interest on the money in your savings account to ever get ahead. In fact, inflation will cause you to lose money over time. Instead, if you want to get rich, you need to invest your money in the stock market or real estate. Talk to a licensed broker and let them show you the true path to wealth.