Saving money is counterproductive. While it’s true that you need to save some money, as repugnant as the idea may be, saving for an emergency, an unforeseen calamity and to create a nest egg for eventual investment are all valid reasons to save money. Beyond that, saving is an exercise in futility and here are five reasons why.
If you save $100 per week in your cookie jar for one year, you will have $5,200. That sounds great but if you invest $100 per week, at the end of the year you will have significantly more money to show for your efforts.
Even the desultory investor can do better than the saver. For example, if you open an account paying interest at the rate of .02 percent compounded monthly, you will have almost $5300 after one year.
Investing your money rather than saving it is the smart play for the following reasons:
1. Inflation
Simply stashing your money in the cookie jar does nothing to protect you against inflation. The buying power of any money you save is under constant attack from inflationary pressures. Your cookie jar money is doing nothing to offset the inflation. So at the end of the day, your savings actually have less buying power. Investing, even for the paltry return in the above example, gives you some protection against inflation and helps preserve the buying power of what you are setting aside.
2. Wealth
Wealth cannot be achieved by simply saving money. To acquire wealth, you must invest in real estate, in stock, in bonds, or similar investment vehicles that provide an opportunity for significant returns. For example, purchasing dividend stock can provide returns substantially higher than the .02 percent in the earlier example. Many blue chip stocks pay dividend many multiples of .02 percent. Alcoa Aluminum, for example, pays a dividend to its shareholders of 1.5 percent, 75 times that amount to be exact.
3. Goals
Regardless of the material goals you establish in your life, investment is the surest route to achieve them. Every journey has an element of risk and that is no less true with investments. As you embark on the journey, you must establish the level of risk you are willing to assume. The risk versus the reward must always be considered. High returns frequently involve a greater risk of loss. Never risk more than you can afford to lose. Youth is an advantage. You can take on greater risk when you are young because your earning potential is high. Older investors must take a more conservative stance. They haven’t the longevity of earning power to recoup significant losses.
4. Quality of Life
Investing enhances your quality of life, at least in the material sense. While you may say that material things aren’t important, you may feel differently if you have no material things. Quality of life contributes to health and better health enhances longevity. So if you have no interest in material things, consider your health.
5. Providing a future
We all strive to give our children a better life than we enjoyed. It is in our DNA to do so. Sound investments can ensure better opportunities for your children, in terms of education, business opportunities and health.
Choosing a wise investment is often the most difficult part of the process. If you are uncomfortable with stock, consider investing in real estate. Single family homes are being purchased by hedge funds in huge numbers. Hedge fund managers know there is a huge market for rentals and they are determined to cash in. You might profit from this trend by investing in rental property rather than stock.
Not comfortable with real estate, try investing in bonds or perhaps a business.
You can even create passive income by investing little more than you time and talent. Author an e-book … start a blog. Blogs have income generating potential from advertisers. Widely read blogs can earn a significant income.
Perhaps your talents lie elsewhere. If you are software savvy, create an iPhone or Android application. Useful applications can generate a good income stream.
Regardless of the investment vehicle, it is paramount that you do your homework, your due diligence as they say in the investment world. There is no substitute for comprehensive analysis. If you don’t understand an investment, stay away from it. Knowing your limitations is important but expanding your horizons is more important.
Take advantage of every opportunity to learn that which you do not know or understand. If stock as in investment seems out of the question, hit the Internet and research the subject of investing in stock. Knowledge is power and as you gain knowledge you gain the ability to participate in a greater variety of investment opportunities.
Growing wealth takes work. If it’s too much for you, just continue to save your money in the old cookie jar. It is preferable to not saving or investing at all. Just don’t expect to get rich.
Positive outcomes are more likely to be achieved through investment than through savings. While it is true that an element of risk is incurred when investing, is it really significantly higher than the risk of losing the buying power of money that is simply saved? It is up to each individual to answer this question and act according to his /her convictions.
Andrew Cravenho is the CEO of CBAC LLC & Factor Auction. As a serial entrepreneur, Andrew focuses on helping both small and medium sized businesses take control of their cash flow. Prior to CBAC, Andrew founded an annuity financing company relieving tort victims of financial hardship.
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