Many people are heavily involved in one savings scheme or the other, believing that as long as one has savings the future is bright for them financially. Nothing could be further from the truth. Having plenty of savings does not guarantee wealth or a comfortable retirement, even if you end up having millions saved.
It’s a fallacy to depend on one’s savings and think that everything will be well financially. I used to think that if one is able to save lots of money while actively employed then retirement would be a breeze. After all many financial planners and experts talk about saving for retirement. In fact the main idea behind pensions is for employees to save from their earnings with the assistance of their employers.
My position on this issue is driven by the following considerations:
The value of money is constantly falling with rising inflation. What One Million Naira can buy today will not be what it can purchase in five, ten or twenty years’ time. This means that your savings will be depleted faster and faster when you eventually have to fully depend on it at retirement. Savings will not be able to take you far.
What if the bank, insurance company or PFA where your funds are domiciled collapses? This is the season of financial crisis, no organization is immune. One could literally lose everything in a short time. Nigerian depositors are entitled to meager sums in the event there is a bank collapse, which is paid by the Nigeria Deposit Insurance Corporation. This compensation is not dependent on how much you have saved. It is thus quite risky to depend on savings.
Believe it or not, your savings is helping to make another person wealthy! Financial institutions take the pool of funds in their care and aggressively invest it for the highest possible returns, while providing the owners of the funds with a pittance as interest. These financial institutions are owned by shareholders who see their stock values increase as they trade and become wealthy with other people’s money.
Fourth, keeping money in savings is not an investment strategy. Keeping money in savings does not require any special knowledge, skill or ability. In fact anybody can do it. An investment strategy at this stage of your financial life should be focused on generating cash flow to infinity for you. Keeping money in savings generates very little cash flow, especially since interest rates are paltry.
Building wealth requires the application and mastery of sound financial principles. It is thus essential for those who desire to build wealth to invest in financial education. This is the only way one can build wealth because it requires knowledge. Since anyone can start saving then no financial education would be sought, thereby severely hindering the individual from being able to build wealth.
Sixthly, forget about amassing wealth if you are not prepared to take on a reasonable amount of risk. In fact making money and then immediately giving it to someone to keep for you in savings constitute low risk. This is why the returns on this activity is quite small, compared to investing which comes with some form of risk. Guess who gets the bigger reward? The one who take risks of course!
Finally to be comfortable financially at retirement your savings must be properly engaged to produce more money for you. Ideally retirement should not mean a drop in your means, or in what kind of lifestyle one was accustomed to. Keeping money in savings is akin to “parking” your money, putting it in a place where it does not produce when it has the infinite capacity to do so for you. This decision could be hurtful in the long run.
Once you have kept enough in an emergency fund, made up of at least six months living expenses, then you need to put the rest of your savings into investments. These cash flow generating investments should be properly researched and carefully chosen to produce wealth for you.
There are basically four areas you could invest in – business, paper assets, commodities and real estate. Most people invest in paper assets – stocks, bonds and mutual funds because they are the most liquid. However these assets are the ones investors have no control over. Investors have no control over how the company invested in handles income and expenses etc. You would be better served investing in the other three.
If you’re interested in growing your wealth over long periods of time — and most middle class investors will need to grow wealth rather than just preserve it if financial independence is an appealing goal — you’ll need to consider riskier investments than savings accounts. There is a dizzying selection of investment types ranging across the entire risk spectrum, from money market funds — low-risk investments similar to savings accounts — to complex financial derivatives — risky financial moves often best left to professional investors.
