Moneycontrol
Last Updated : Apr 20, 2018 07:11 PM IST

Why Saving Alone Doesn’t Help Create Wealth

The following article is an initiative of NSE and is intended to create awareness among the readers


When people start off earning, they are often given this age-old wisdom by their elders and peers – “save something from what you earn”. The age-old advice has helped generations in surviving through tough economic times. However, as the term ‘age-old’ goes, this wisdom is incomplete in today’s world. Let’s recall the words of the American businessman Robert Allen - “How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.”


And he’s right. There are strong reasons why savings alone will never be able to make someone wealthy. Inflation and the ever-expanding needs & wants paradigm of human are at the front-lines of this attack on ones savings.


The rate of inflation in India has been consistently in the 4-7 % bracket, implying that every year, no matter if the supply of commodities increase or not, their prices will keep on increasing. Interest percentages on saving accounts hang around in the 4 -5 % for most banks (6-7% offered on accounts with at least 10 Lakhs and upwards of savings balance), making it highly unlikely for the savings to be able to catch up with the rising prices. The ever-increasing taxes and expenses eat into the income & savings in the long run.


Taking of expenses, there’s another critical factor influencing this equation - the ever-expanding needs & wants paradigm


Needs & wants paradigm? What’s that?
As humans, we tend to have basic requirements of food, shelter, clothing, electricity, and a few other things here & there. These are, in the simplest terms – needs. Things that are required for survival.


Then, there are other things that form the wants – a bigger car, mobile phone with more megapixels in the camera department, eating out in the new continental restaurant – the list goes on and on. The basic emotion derived from indulging in this side of the equation is gratification. We feel satisfied by possessing things.


The most common fallacy that today’s generation faces is that with their increasing incomes, their spending power goes up in equal proportions. In the most rational scenario, you should be able to spare more money towards your savings & investing exercises. This is clearly far from the reality. Increased burden in the ‘wants’ side of the equation limits the possibilities of saving and investing. They act as just another leech feeding off the earnings & savings.


So, what do we do about it?


Shift in thinking:
There’s an incredible need for segregation & prioritization between what’s necessary for survival & what’s a luxury (and not important). This calls for inculcating a discipline in the way we spend our money & the things we spend it on.


Turn to investing:
The luxuries of life become more accessible when you set-up a system that can fund these without breaking your back. By sparing some money from our savings & investing it, we have a chance to turn this money into an asset. Money once turned into an asset, does the heavy lifting on our behalf to create more money.


Since our time is severely limited & not scalable, we turn to the resource that’s incredibly scalable – money itself. By acquiring assets, we can plug in money into mechanisms that cause it to grow. Over time, as money increases exponentially, we stand a chance to beat the rate of inflation, taxes, and our own expenses.

As a closing comment on this, we advise you to take up investing seriously, and think of ways to grow your money through this route. If the process of investing feels overwhelming, there’s always a financial advisor near you who lend you their expertise to grow money. It might seem like an investment, but a good advisor can help you grow your money. That, as we call it, is a good investment.

First Published on Apr 20, 2018 06:57 pm
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