By Kenneth Doghudge
IS saving money your winning strategy to building wealth? If it is, then you had better seek for another strategy with better chances of success. This is because no one has been able to build wealth just by saving money.
Managing savings is a good discipline which can result in having a comfortable quality of life, but not a wealthy quality of life. Following are some reasons why saving money alone won’t make you rich.
The rich don’t ascribe success to savings
From the study of multi-millionaires and billionaires in the last couple of years, not one hinged their success in amassing wealth to saving.
A good number of them mentioned taking advantage of opportunities, meeting needs, solving problems and surmounting obstacles as the key that propelled them to achieving substantial wealth and fortune.
Currencies lose value
Every currency whether it is the euro, pound sterling, dollar or naira continues to depreciate in value on a regular basis. The value of the naira and what it could buy, for example, in 1976 cannot be compared to what it is now in 2016.
By 2056, it will have drastically decreased in value and there is no sign that this trend will abate. Putting money into savings for the long term yields funds whose values will have seriously depreciated from what it is today.
This is the major reason why you cannot build wealth just by saving money because the money’s value is constantly being eroded. The prices of goods and services constantly increase while the value of money used to purchase them goes in the opposite direction.
Low returns on savings
The returns that one receives from keeping money in savings are so minute and inconsequential. These days, savings accounts attract little interest per annum for depositors, which is hardly a motivator to make one want to save.
Savings must go with investment
Money earmarked for purposes of building wealth may be saved first and invested afterward. Investment is simply the process of channelling your resources into ventures that will cause them to multiply and increase, thereby putting the money to work for you.
The rich know this very well and are constantly on the lookout for opportunities to put their money to work, so it can multiply and continue producing wealth for them. Putting money into savings alone will not get money to work for you.
Banks can fail: A number of banks collapsed several years ago thus causing depositors to lose their funds. Thousands lost whatever they had kept as savings in the affected banks, with some being paid a pittance compared to what they had saved by the Nigerian Deposit Insurance Company (NDIC). Many are still trying to recover their lost funds.
Even though steps have been taken to ensure that there isn’t a repeat of this occurrence in the Nigerian financial system, the fact that it has occurred before is a pointer that there is a possibility it could happen again.
Unexpected expenses deplete savings
No matter how disciplined one is, necessary expenses may arise that one may have to offset from savings. For instance, if a family member becomes ill requiring expensive treatment or if you lose your source of livelihood, then there is no option but to draw substantially from your savings to stem the tide.
Liquidation of assets
The only way one can effectively plan for this is by having an emergency fund kept aside with at least six months of expenses for such contingencies. But what if it is inadequate? Then one begins to use up other savings and even begins to liquidate assets.
Detracts from opportunities to grow wealth
Those who are obsessively driven to save money become cautious when opportunities to grow their savings come their way. Now there is nothing wrong in exercising caution and weighing all the pros and cons before investing hard earned resources, but in wealth-building, there is always an element of risk involved. Being cautious can cause one to prefer to keep secure the little resources that one has rather than seeking for ways to multiply it.
Even though savings will not make you rich, by all means don’t stop saving. Saving is usually one of the first steps anyone who desires wealth needs to take for it is proof that your money is under your control and not vice versa. The key is adding other essential actions such as investing to your savings effort and it eventually begins to yield wealth and fortune.
*Doghudje is Managing Director of GfK RT Nigeria and author of several articles on personal finance, savings, investing and wealth-building.