Why Saving Will Make You Poor | The Millennial Millionaire

We’re never taught

We are taught so much through schooling, however one thing that’s never covered is why saving will make you poor. We all have good connotations of saving, it goes hand in hand with wealth and a good financial life, however, I’m here to tell you why it’s all bullshit.

Inflation kills First thing we need to take into consideration, is inflation. The current inflation rate is around 3%, while the best savings rate you can get without restricting your access to your funds, is 1.1%. So, what does this mean?

In short, the real interest rate you are receiving is roughly -1.9%. Therefore, in real terms you’re LOSING money by ‘saving’.

Now, to break this down further, the purchasing power of £100 will decrease if you leave it in savings.

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Let’s say you can buy a chocolate bar for £1 today, and you have this £100 in savings. Next year, you’ll have £101.10 if you saved it. That’s great, you got more money. But no, the chocolate bar has been subject to inflation and now costs 3% more, at £1.03. What does this mean for us consumers? Previously we could buy 100 chocolate bars exactly, but today, we can only afford 101.1/1.03=98.15 chocolate bars!

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The cost of the products and quite likely the cost of living will increase through inflation (currencies are designed to always have inflation, deflation causes more economic turmoil), and the savings

rate will always be less than this.

Banking is a business

Now you may be asking why? Well, the banks are businesses, they need to make money but in real terms. So, they’ll take your money and pay you 1.1%, but then they’ll loan that out to others at 5% or something along those lines, so they’re not keeping your money sat and doing nothing with it as you might imagine, they’re making your money work for them!

Measuring wealth

Now we’ve learnt from the smartest minds, Albert Einstein, that the eighth wonder of the world is compounding, so let’s say you have £40,000 in savings and you’re a 35-year-old, saving for retirement, and you don’t touch this money. In 30 years, you’ll have:

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40000*(1.011)^30=1.38846*40000=£55,538

That’s great! Or is it? Let’s assume (and this is a huge assumption but for the sake of this example) that inflation remains at 3% for this time period, let’s measure our wealth in chocolate bars once more. So previously, we had 40,000 chocolate bars of wealth. Now a chocolate bar’s cost is:

1*(1.03)^30=2.427

So we have:

55538/2.427=22,883 Chocolate bars of wealth

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Our real wealth has halved in this time, which is fundamentally the reason why savings will make you poor. There are smarter things to do with your money which you can find on my other blog posts such as 4 Steps to Become a Millionaire.

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