I’m sure you’ve heard this statement said many times. I mean, if you’re given to reading any good book on personal finance you would have read somewhere where the author made this resounding(or as some would want to admit, ridiculous) statement. My first exposure to this statement came from one author I almost idolize, Robert Kiyosaki. I’ve so read all he’s ever said that I can almost say that my first book “The Game of Money” might in a
BIG little way re-echo some of his thoughts. I’ve heard so many people discredit and make light this statement(usually bankers, accountants or really hard working people) that I feel I should clear the air as to what I understand this statement to mean.
First I must say I’m not an accountant so what you’re about to read is simply my version of common sense as regards to financial intelligence.
So why should you not save money if you want to be rich?
Well, in my opinion, 3 reasons.
1- IT JUST DOESN’T MAKE FINANCIAL SENSE
What’s the average interest rate for a savings account in Nigeria(or wherever else), usually single digits. Say 5% or less. What about fixed deposits, for Nigeria, it’s about 9.7%( nigeria.deposits.org)Let’s round it up to 10%. If you want to just get by, this is great. But if you want to get rich, it’s trash. Why did I say this.
Let’s assume you fix N50,000 a month(that’s N600,000 annually) for 20 years at 10%, taking account of the principles of compound interest this would give you N38,401,499.20. WOW! Thats much. It really does sound like a lot of money doesn’t it. It’s these BIG figures that inspire us and it’s good. But the real question is this; what would that money be worth 20years from now?
What do I mean?
Let’s back up a bit.
Our parents tell us that 20 years ago(in the good old days), you could buy a car in this country for around N3,500. Back then N3,500 was probably a lot of money.
Imagine someone told your dad to save. This is what the conversation would be like:
Mr Segun, if you keep saving N3,500 every year for 20 years at 10% interest, based on compound interest you would get N224,008.75. Imagine how many cars you would be able to buy for yourself, your children and grand children by that time. Your dad would have shouted WOW! That’s a lot. Then fast forward to 20years later. He’ll get the money quite alright, but would he be able to buy a car?
See your money in the bank is losing value more than it’s gaining numbers. It’s not just Nigeria. The US dollar used to be more valuable compared to an ounce of gold($42.22 to an ounce in the 1979s) but now it’s around $1,305.9 an ounce.
Don’t get me wrong, saving is good. But it’s really elementary. To be rich you need to be smarter than that.
2- IT’ SO STUPID, THE BANK YOU SAVE IT IN DON’T SAVE IT IN ANOTHER BANK
Have you ever wondered what the bank does with your money?
Do they save it?
If all they did was save your money, then saving money should be the greatest financial secret there is. But alas! They don’t. They tell you to save your money with them but they don’t even save their money(which really is your money) with a bank. Why is that? Because they don’t think it’s wise to do it. Actually, they think it’s stupid to do the same thing you do. I’m not going to bore you with all the explanation of what they really do because I actually shared something about it in a blog I once ran some years ago. The whole process is called Fractional reserve banking check it out here(http://dgameofmoney.blogspot.com/2010/07/crash-course-chapter-7-money-creation.html )
So if they don’t save the money you save with them, shouldn’t you find out what they do and copy them?
3- YOU’LL BE BROKE WHEN YOU REALLY NEED IT
Let’s back up a little to Mr Segun of 20years ago. Now 20years later. He’s got about N224,000 in his account and due to how fast things have changed he’ll realize he’s broke. If you don’t want a similar story, it’s time to do things differently.
Doing things differently is a lot harder. It means you have to become better and more financially literate. Sometimes it means you might lose what you have to gain invaluable knowledge but in the end you would realize that what makes you rich isn’t your savings, it’s your knowledge. Knowledge of how to multiply money. Because the money in your bank right now is being devalued GEOMETRICALLY by the second, so to keep up you must and I say must MULTIPLY your money faster than the economy can ever devalue it.
Do rich people save? Of course they do. But they know that saving money is only as good as it being a means to something more of a smart financial plan as opposed to it being the financial plan itself.
This is the first of the Money Smart series.