3 Reasons Why Saving Money Means You’re Losing Money
The conventional wisdom of the so-called financial experts is that the best thing you can do to have financial independence and financial freedom is to save your money.
I don’t agree. In fact, I believe savers are losers. Of course, I’m speaking of a certain kind of saver. The one who puts money in a low-interest account and hopes that by the time they get to retirement it will have magically grown into all they need to live on.
That doesn’t work, and it’s bad financial advice. In an economy where almost everything is built to take your money, saving it is of little value. From inflation to taxes to hidden fees in your 401(k), the system is stacked against you.
My poor dad always said, “Work hard and save money.”
My rich dad always said, “If you want to be wealthy and financially secure, working hard and saving money will not get you there.”
This is a lesson that Danielle Town, a former burned-out corporate attorney, recently learned. Wanting to be free of having to depend on her salary for financial security, she initially thought the path forward was to save money.
Financial Ignorance Is Costly
Town quickly realized, with the help of her father, that she was “losing money through doing nothing.” Or actually, her money was doing nothing.
The big realization for Town was that inflation was a force eating into her money. As author Emmie Marin shares:
If you had stuffed $1,000 in cash under your mattress 50 years ago, today it would have the same buying power as only $137.45 did in 1968.
However, that same amount invested with compound interest would have grown to about $20,000, assuming a 6 percent rate of return. Even if you only earn a 4 percent rate of return, it still grows to around $7,000.
If you’re a regular Rich Dad reader, this probably is something you already know. But perhaps the most enlightening thing about reading Town’s story is she had no idea, even by her mid-thirties, about the destructive power of inflation. As she relates to CNBC:
“Now, I realize that to some people who know about financial stuff, this sounds ridiculous,” she says. “But I didn’t know anything about financial stuff. I knew inflation was a thing that felt very macroeconomic, but I had never connected it to my actual savings.”
This highlights an important lesson about financial ignorance—it’s not bliss and it can cost you a lot of money.
Three Important Factors That Steal Wealth
While Town rightly shares about inflation as a reason not to be a saver, there are actually three forces that steal the wealth of someone who relies on savings.
“People who work hard and save money have a hard time building wealth because, relatively, they pay more in taxes,” said rich dad.
He went on to explain that the government taxed savers when they earned, saved, spent, and passed on their money in the form of income tax, capital gains tax, sales tax, and estate tax.
There’s a reason why the government taxes savings rather than giving a tax break. As I’ve shared before, the government gives tax breaks in order to encourage behavior it wants people to participate in. Saving is not an activity the government really wants to encourage—even though it pays ample lip service to it—because saving does not grow the economy, debt does.
So if you’re a saver, you’re a loser because of taxes.
Rich dad also explained that another tax decimated savers—a hidden tax that Town discovered called inflation.
Rich dad used a simple figure of $1,000 to explain why savers almost always became losers in the economy.
Rich dad explained, “Your $1,000 is immediately eaten away by inflation, so each year it is worth less.”
Rich dad went on to explain that each year the interest the bank paid you was eaten away by both taxes and inflation. The government took 30 percent of the interest earnings through capital gains taxes and inflation ate away at almost all the rest…or more.
As mentioned above, $1,000 saved 50 years ago would be worth $137.45 today. That, coupled with taxes, means you are in the negative when it comes to the purchasing power of your dollars when you are a saver. That is why rich dad thought that working hard and saving money was a hard—if not impossible—way to get rich.
So, savers are also losers because of inflation.
- Avoiding risk
When you work hard to save money, you place your “security” in those savings. It becomes very hard for those who spend all their energy saving money to branch out and invest it for fear all their hard-earned money will be lost.
“People who work hard and save often think that investing is risky,” said rich dad. “And when you think something is risky, you avoid learning.”
Rather than take a perceived risk to grow their money exponentially through investing, most people take the “safe” route of saving their money because it is what they know and understand.
Unfortunately, as we learned above, saving is not safe. In fact, it often is the riskiest way to use your money because of taxes and investing.
The Need For Financial Intelligence
At the end of the day, why do people save? For most, it is to prepare for retirement. Yet, most of us know that saving itself is not enough to prepare for a secure retirement. This is especially true for young people who will never see a pension from their employer.
Today, everyone is expected to invest for a secure retirement. Unfortunately, our schools do not prepare us to invest wisely or well. So, it is up to us to become financially educated—and to teach our children financial education as well.
This is something the wealthy have done for generations. For instance, Mike, my rich dad’s son, had an investment portfolio of $200,000 by the time he was 15-years-old. “Whether he chose to be a policeman, politician, or a poet,” said rich dad, “I wanted Mike to first be an investor. You’ll become far wealthier if you learn to be an investor, regardless of what you do to earn money along the way.”
The rules have changed. In today’s Digital Age, you need a greater level of financial sophistication, and so do your kids. I encourage you today to increase your financial education and prepare for a brighter, secure financial future.
Editor, Rich Dad Poor Dad Daily