Wealth is the accumulation of efforts we’ve put into our financial lives. It’s essential that it is spent the right way or we’re merely putting it down the drain. There are multiple ways for us to acquire wealth and build it up from small amounts. The most popular way to build wealth is with a savings account, since this allows the bank account itself to simply work for our benefit. This doesn’t require active engagement, as something like the management of investment requires. Nonetheless, there are things to consider when it comes to what precisely we should spend our savings on. Merely having savings is meaningless in itself – it’s used to help us in the long term, providing a safety net and foundation that allows us to continue living comfortably. This is especially the case when income is uncertain.
Why savings is important
Managing a savings account is both easy and important on a broader level. A savings account’s primary purpose is to maintain whatever money you keep in it. But, by the mere virtue of having money in an account, we can generate interest. Even more impressively, we can benefit from the magic of compound interest. To understand compound interest, this is what Money Mini Blog says:
“Interest generally compounds annually, so that means you earn 6% on your principle. Keeping with the above example, the first year your principle is $100,000, but at the end of that year, you earn 6%. So that means the second year you’ll be earning 6% on $106,000.”
The famous definition of compound interest is “interest on interest”. That is, the new interest rate works on the increased amount that came about (because of interest), not the initial amount you had. That is, it keeps growing and growing, because it revises what the principal amount is. There’s nothing a person needs to do to make compound interest work – in fact, we need to do the opposite of “something”, letting the money stay where it is in the bank.
We might wonder how a bank benefits, when it seems obvious clients are the ones benefitting. But all transactions work on a basis of mutual benefit or else they would never take place at all. Banks benefit because banks need money to deliver on services and products. A bank without money is like a petrol station without petrol. People forget that they money doesn’t sit there untouched because clients themselves aren’t touching it. The bank uses our money for other clients. That doesn’t mean we should expect to suddenly see our bank accounts drop (though that can happen during a recession, when banks are not trusted, and so on.)
It’s not only good, but essential that people begin taking savings seriously. As Investopedia points out:
“If you have a high income and low expenses, you might accumulate enough to retire in 10 years. For most people, it takes closer to 40 years. But at some point, if you save and invest regularly, you should be able to live off the income generated by your investments – the saved money that’s working for you. The earlier you start, the more time a small amount of money has to grow large through the miracle of compounding.”
The most obvious items to spend savings on are investments that themselves net better returns. Whether that means high return short term investments, property or others, we must look at what would benefit us the most. There are so many options but we must approach an expert, finding out what is the most suitable option for us – given our income, savings, goals and so on. Of course, we could diversify, putting our money into all sorts of stocks and options so that we’re almost guaranteed to reap benefits. Everyone knows the problem with putting all the eggs in one basket.
Property: one of the best places to put our money is property. Whether this is for ourselves, a way to generate further income or simply to watch property rates increase, so we can sell higher, property is a good idea if we can afford it. As accountant and lawyer, Mark Kohler points out:
“I meet with a lot of successful entrepreneurs, and almost every one of them has taken profits from their businesses over the years to invest in rental property. Based on this fact and the list above, I have consistently urged my clients to buy one rental property a year and already have clients with rental properties earning them money they never imagined they’d have.”
Stock: Playing the stock market is obviously the road to success, but doing it well is a balance of luck, skill and timing. This is why we must know the facts early and work with the right people to get it done. Speaking to brokers and financial advisors, we can put our savings into the right investment vehicles to get the best returns.