Here’s Why Only Saving Money Is Not Going To Be Enough In Today’s World
8 December 2017
Every time I open up Instagram, I’m almost tempted on a regular basis to take an impulsive trip to the latest “in” country to visit. It could be Niseko, the Maldives, Greece or Iceland. I’d tell myself I could just save up for a couple of months and just put all those savings into a luxurious short break overseas.
But in reality, I’d never do that, because all that money could be put aside for something in the future that, in my opinion, would be more worthwhile—like early retirement, for example. That’s not to say that I’m never going to take a holiday till I’m 60 years old, but that I definitely need to be putting away money for the future when I can truly enjoy the fruits of my hard labour.
If you’re nodding in agreement, you already know the importance of putting money aside for future goals. The trouble is, many people think of this simply as “saving money”.
But guess what? Saving money—i.e. depositing it in a bank account—isn’t always a good idea and can even derail your financial goals if you’re not careful.
Saving is important when you want to achieve short-term goals…
First, let’s look at situations where saving money is the right thing to do.
When you have a short-term goal in mind, by all means save for it. For instance, if you want to buy the iPhone X in 6 months’ time, the only sane way to do so would be to put the money till you have enough, then buy it.
In this case, your goal—to purchase an iPhone X—is close enough such that the price will not be affected by inflation at the time you reach your goal. Your timeframe is also short enough that you wouldn’t be able to benefit by investing the money.
Generally, any goal that’s less than 5 years away can be considered a short-term one. So whether you’re planning to go on a round-the-world trip in a years’ time or buy a new washing machine, stashing the cash in your bank account is fine. If you know exactly when you will need the money, you can stash it in a fixed deposit, otherwise a high interest savings account is recommended.
…But investing is essential for long-term goals
When it comes to long-term goals, simply saving money isn’t going to cut it.
And the culprit is: inflation. Inflation is the reason everything just keeps getting more and more expensive over time. Inflation is the reason an average meal at Sakae Sushi used to cost $15 a decade ago, but is now over $25.
What this means is that the value of your savings falls over time. In order to ensure your money doesn’t become worthless 5, 10, 20 or 30 years down the road, you need to invest it so it can grow at a rate that hopefully keeps up with or exceeds the inflation rate.
Earlier is always better
So when should you start investing? Well, the answer is: yesterday.
When it comes to investing, earlier is always better. That is because investments need time to grow. The earlier you start investing, the less money you’ll need to pump in in order to achieve the same results. So if you’re not able to put aside as much as you’d like, that’s a huge reason to start investing earlier.
That’s because compounding interest helps money grow, but this growth takes time. Compounding interest means you earn interest not just on the initial sum of money you’ve invested—you also earn interest on your interest! This makes money grow at an exponential rate—the more time you give it, the higher the rate climbs.
Let’s say you invest $20,000 when you’re 20 and retire at 60. Over 40 years, that sum of money, when invested at a rate of 5%, would grow to $140,799.77 (use this compound interest calculator and see for yourself). Now, let’s take that same sum of money ($20,000) and invest it at the age of 40 instead. When you hit the age of 60, it’ll be worth… only $53,065.95.
You can see through this simple table that while you may be investing your money for double the time period, because of compounding interest, you make much more than double the amount (comparing a 20 year investment period to a 40 year one).
Ok, but I don’t have $20,000, or even $2,000, just lying underneath my pillow right now, you say. That shouldn’t stop you from investing at all. Let’s say you set aside $400 a month to invest. That’s $4,800 a year. If you start at the age of 25 and invest at a rate of 5% annually, that compounds to $455,214.35 by the time you are 60.
[Read also: Step-By-Step Guide To Stock Investing In Singapore]
It is thus easy to see that when it comes to achieving long-term money goals, investing as early as possible is the way to go.
This is especially pertinent for retirement, since retirement-readiness is such a big problem in Singapore due to inflation and the high cost of living.
Other long-term goals that might be worthwhile investing for, might include the purchase of your future home or your kids’ university education. Just make sure you tailor your investment strategy according to when you need the cash—the closer you are to the date when you will actually need the cash, the lower risk your investments should be.
Have you started investing yet? Tell us why or why not in the comments!