We’ve all heard the phrase “save, save, save,” with a few mentions of investments thrown in for good measure. But, in reality, they are inescapably connected. Saving without investing can indeed be costly, as this can result in the loss of money you’ve managed to save.
Consider the following scenario: you’re saving for a car and earning NGN 200,000 per month. The car costs 2.1 million Naira, and you’ve resolved to save NGN 100,000 for a year and a half in order to purchase it. You determine that saving money into your savings account, which offers you 5% interest annually, is really the best way to go.
Consider the scenario one more time. What, in your opinion, is the problem with just depositing the money into a savings account?
So, if you figured it had anything to do with the interest rate on a savings account compared to the ever-rising inflation rate, you were on the mark!
Based on this background, we’ve highlighted below the major drawbacks that could result from choosing to save without an investment end-game in mind:
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Inflation Rate.
The instance I painted earlier illustrates to a large extent the issue of saving without investing, as well as how inflation can be a real pain in the butt. The problem is that even if inflation doesn’t surpass the current rate of 18.7% in 2 years (which is very unlikely, by the way), your savings will have lost at least 13% of its value, assuming the bank keeps up with its promise of 5% interest return on the savings.
What this means is that the spending power of the total money you now have has decreased from the original value of say, NGN 2 million in 11/2 years, assuming a 5% interest rate, and an 18% inflation rate to NGN 1,740,000. The actual value of your money after saving in a traditional savings account is NGN 1,740,000, but the face value still looks like NGN 2 million.
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Low Annual Interest Yield
The low yearly interest yield on funds in a typical savings account is a major drawback. Most banks currently offer a savings account with a 5% annual interest rate.
Saving is fantastic, but earning 5% on your overall savings isn’t the best method to make your money work for you. Because, as they say, money doesn’t grow on trees, investing in high yield investments or investments that give greater rates is a far better method to ensure that you get the most out of the money you’re putting aside. As a result, it’s critical that you commit your money to things/institutions/ideas that will pay you.
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No Guarantee on Interest Rate
An additional headache with saving without investing is that you are not even sure if you’ll get interest on your funds. Especially if you take out a portion of your money on a regular basis. Instead, you continue to account for losses in the form of account charges, which further depletes your funds.
Investing easily overcomes all these dilemmas because your money is fixed and your return on investment, depending on the type of investment, is solid.
You now understand why investing, rather than simply putting your money in a savings account, is a wise decision. Thank you so much! So, what are you awaiting? Begin investing right away.
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Written by: Shola Ayeotan