I learned my first money lesson from my parents. Did you?
My parents are thrifty folks. They are always on the lookout for a bargain, down to the smallest item even when grocery shopping. The first thing they taught me about money is to always spend less than I make.
It is the first rule in personal finance – never spend more than you earn.
The Jews are one of the best wealth creators on earth. As part of their culture, Jewish parents teach their children about wise money management as soon as they can talk. One of the critical lessons is to have a “savings” jar. Children are required to put money in the jar, and they can only open it on special occasions like a medical emergency.
Now we can agree that saving is essential. But the problem is that saving money is hard. It is a money habit that is hard to practice due to the human nature of desiring instant gratification. If everybody can help themselves, there will be no need for charity. Kudos to you if you can regularly save a portion of your income.
During the old days, some determined families save their cash in Milo tins. It took a long time for them to trust the banks and deposit their money with financial institutions.
Back then those who did not bank in their money were losers because let’s face it, you don’t gain any interest return by having your cash sitting idly under your pillows, do you? Moreover, what if you got robbed?
After decades of changes, people are more comfortable depositing their money in banks nowadays. Most people perceive Fixed Deposit as the safest investment that gets guaranteed interest income, and capital protected. In Malaysia, we also have PIDM to safeguard your bank deposits with insurance. However, the same situation still persists – savers are still losers. You might be robbed too.
Now you must be wondering why I say saving money could get you robbed later. I am referring to the effect of inflation. Imagine your FD interest being 3.5%, and the inflation rate is 4%. The phenomenon depletes your buying power day by day, year by year…until it might be too late for you to do something about it.
Banks run a leveraged business. Your money in a bank’s savings account allows the bank to lend a higher amount to someone else, who is more capable of making good use of it. Borrowers fund their business ventures and real estate investments with the money you put in the bank.
In other words, think of the bank as the middleman. On one side, the poor and the middle class try to save as much as they can with the banks. On the other side, business owners and investors borrow more money through bank loans to leverage up their business expansions and investments.
Savings is for losers. Inflation and also the government that prints more money are probably “robbing” the savers. Going to the other side, when you take a loan from a bank, they become your business partners because they have confidence in you to make better use of the funds.
When you face problems while trying to pay back, they will share your fear as well. Therefore, if you want to beat inflation and do not want to see your savings depreciate over time, you will need to be the player on the other side.
In fact, saving money is just halfway to financial success. If you do nothing with the money to generate a higher return, you will always be on the losing side. Investing your savings and also borrowing more from the bank to invest will make you a player on the other side.
Treat the bank as your financier to fund your business and your investment. Don’t treat them as a safekeeper of your money. If you do, just wait to be robbed.
About the Author
This article is written by KC Lau. KCLau is a financial educator, having published seven books including the current bestseller Money Smart, and co-created a dozen online financial courses. He gives away his popular Money Tips e-book volumes free at his website: https://KCLau.com
