Every kid in America and elsewhere knows that he or she should ‘save for a rainy day.’ Teaching kids to save at an early age is definitely a good idea and parents who train their children to save are training them to be financially responsible when they become adults. You really can’t start too young on this important financial habit.
With that said, it has to also be pointed out that saving alone won’t do you any good. The mere act of saving for a rainy day in the future might actually be bad for your money if you just limit yourself to saving. Why? One word: inflation.
Sure, you put your money in the bank instead of spending it. You did a good job. However, you should not let your money stay in the bank. If left there long enough, you simply won’t be able to buy as much stuff with the money you saved. In other words, inflation ‘rots’ your money. With every passing year, the value of stuff your money buys gets lower and lower.
Eventually, your savings in the bank won’t be worth anything at all. That’s how serious of a problem inflation is. This is why it is important to understand that saving is just the first step of responsible money management.
Putting your money in the bank enables you to resist spending it. However, if you really want to be fiscally responsible, you must figure out a way to make your money grown. In other words, you have to invest your money. Saving and investing are twins. They are interlinked. If you just save without investing, you are spinning your financial wheels and you will eventually lose the money you put in the bank. You have to invest your money. Without investments, saving is futile. Saving is a good habit but it is an incomplete habit.
Get into the habit of investing
As the amount of cash you have saved begins to pile up, start looking for places to invest your money. This is the hard part of investing. You have to figure out where to put your cash so it generates more money with time. The first part to investigating investment options is to figure out how much risk you want to take.
All investments have risks. Even your bank savings have some risks because the bank may go under, and your recovery is limited to the amount of savings insurance mandated by law in your jurisdiction.
Keep in mind that the more risk you take, the higher the returns. The lowest risks are certificates of deposits or time deposits. These pay very low interest rates. In fact, many pay below the rate of inflation. Pick only investments that pay more than the rate of inflation. Bonds are riskier, but they pay a little better.
Stocks are quite risky but the right stocks appreciate quite well. Real estate pays decently over the long haul but the downside is that you can’t free up your cash quickly. Real estate is not very liquid.