Through the lack of financial education we receive throughout our lives, we tend to have a lack of knowledge and understanding of investing and what to do with the extra money we have lying around in our bank accounts. Most of us reach the age of 14 or so, and our parent or guardian opens our first current account, and we begin managing the money we get in and out of this account. Unfortunately, most of us continue this until adulthood, using our current account and maybe a savings account, which we eventually open after wanting to save for our first ‘big’ purchase.
Saving money is important, and the general advice we all receive is to save money and put cash aside in case we need it. That advice is not wrong; saving is completely necessary. But here’s the truth no one told you:
Saving alone won’t make you rich. In fact, over time, saving can actually cause you to lose money.
I know, that sounds crazy, right? You’ve been putting your money aside in your bank or savings account, and I’m telling you that you’re actually having the opposite effect of your intention. But let me explain why saving and investing are very different and why investing is actually the key to growing your money in the long run.
Why Saving Matters and When You Should Save
Firstly, before I delve into the discussion of which is better, I want to be clear that saving money is not a bad thing. In my opinion, before even considering investing and growing your money, you should save for the following essentials:
- Building an emergency fund (for example, 3–6 months of expenses to cover you in case of an unexpected event in your life)
- Any short-term goals you may have, such as a holiday or a new purchase
It is important, in my opinion, that if the money you have put aside falls into either of the above points, then it should be kept in more of a savings pot where it is liquid and easily accessible instantly. Therefore, you would not invest this. It’s important to note that if you have a bulk sum of money – for example, your emergency fund totals £10,000 – even though this is for your savings pot, you should still shop around to see what accounts are available to give you the highest interest rate possible. Your standard current account and basic savings account barely scrape 1% at best.
However, when it comes to building long-term wealth, saving is not the most effective vehicle. Let’s talk about one of the biggest factors as to why:
Inflation – The Silent Threat
What many people don’t realise about saving money is that inflation slowly eats away at its value. Simply put, inflation means the rate at which the general prices for goods and services rise over time, meaning your money buys less than it used to. This is caused by many factors, including but not limited to a country printing money, excess demand for goods and services, and cost-push inflation.
The rate of inflation averages at about 3% per year. To give you an actual example of this:
If you had £1000 saved up in your bank account and you left it there for 10 years, with a 3% inflation rate, your money’s purchasing power would drop to about £737 at that time.
This means that even though the number is still showing as the same in your bank account – and maybe it grew ever so slightly with interest – the actual value of the money and the things you can purchase with it goes down.
The reality is that most general savings accounts only give you 1–3% on your money. Therefore, when inflation is 3% or higher, the interest barely covers the rising cost of living. Simply put, your return on your money – which you get after inflation – is often zero or even negative.
I say all of that to say this: if you are saving money with more of a long-term mindset, then the chances are you won’t be moving much more forward and potentially might be taking a few steps back as well due to inflation.
How You Can Beat Inflation – The Power of Investing
This is where investing comes into play. Investing can come in many different formats – but the general consensus is that you are putting your money into some form of asset which can grow in value over time. This could be stocks, ETFs, mutual funds or even real estate. There are many options for investing and none of which I will recommend, as this is something you should research and decide on your own. The reason this is better than just saving is because your money will have the potential to grow past the rate of inflation, especially in the long term, as well as benefiting from compound interest.
Saving vs Investing Example
So if I haven’t convinced you yet that investing is a better vehicle for your money to grow over just putting money away into your savings account, then let’s look at a real example where we compare the two:
Person A – Saves £100 a month for 30 years:
- Total saved: £36,000
- Assuming 1% annual interest, they end up with about £41,000
- But with 3% inflation, that’s actually worth around £28,000
Person B – Invests £100 a month into the stock market for 30 years:
- Total invested: £36,000
- Assuming a 7% annual return (average market growth accounting for inflation), they would end up with about £117,000
- Even after inflation, that’s a substantial increase in the purchasing power of your money
This means that while saving is important and highly recommended for building an emergency fund and for short-term goals, investing is the avenue and vehicle you should be using for anything and everything else which does not fall into those two categories. Investing, when done sensibly, will help you build as much wealth as you can as well as keeping up with and beating inflation.
Conclusion
If you are someone who wants to build wealth long term and wants to start investing, I cannot stress how important it is that you begin as soon as possible. The earlier you start, the more money you can grow with compounding. This is actually one of my biggest regrets – not getting started with my investment journey in my early 20s. Instead, I started in my later 20s. Regardless of your age, do your research and begin now. You should never put money into anything you don’t understand. Once you have your emergency fund set up, you’re ready to go.
Just remember: Saving protects your present. Investing builds your future.
So don’t just save – invest. Your future self will thank you.
Inspired by Rich Dad, Poor Dad