Saving money not always the smartest idea

If you are under 55 years old, there are a few things you need to be aware of if you think keeping your money in the bank is clever.

The older you get, the more important cash preservation becomes, but you also need to understand the effect of the cost of living. If you are not nearing retirement, you don’t have the immediate fear of outliving your money, but this does not mean that “saving” for your old age is actually worth it.

• Inflation causes your savings to become worth less over time.

The value of your money does not stay constant when there is inflation.

Money is valued in terms of purchasing power; these are the real, tangible goods that money can buy.

When inflation goes up, there is a decline in the purchasing power of money. For example, if the inflation rate is two per cent annually, then, theoretically, a R10 Coke today will cost R10.20 in a year’s time.

After inflation, your Rand cannot buy the same Coke it could a year ago.

The inflation rate in South Africa was at roughly four per cent in March of 2015.

However, it has averaged 9.38 per cent from 1968 until 2015.

So, while inflation is pretty low right now, compared to the average, it still means that on average for the last 47 years, your buying power (your money) has decreased by over nine per cent every year.

• The interest you earn will not keep up with inflation

Interest bearing accounts feel the affect in similar fashion.

When interest rates go up, you will earn higher interest and vice versa. The problem, though, is that when rates do go up and you earn more interest, inflation tends to go higher and things become more expensive.

Therefore, your savings will still not keep up with the rising cost of goods and services.

The truth of the matter for all cash hoarders is that the average rate of inflation literally erodes your money to such a degree that, over time, it becomes worthless.

Investment beats inflation. One of the main reason for people who choose to invest in the stock market is to attempt to beat inflation.

Stocks have notoriously done better than cash on deposit as protection against inflation. Simply put, owning shares means you own a slice of companies who provide consumers with goods and services.

You are essentially sharing in the profits they make from providing these goods and services and by doing so protection from inflation. The big risk to you, however is that you could see the value of your investment fall.

The other side of this is the very real risk exists that your post inflation savings may be worth 50 per cent less over the next decade or two causing your money to run out before you die.

Interest rates are going up.

• Here’s what you need to do If you have a lump sum stuck in a bank account, you need to understand that the stock market is an alternative to beating inflation.

By investing, you not only open the window to a new world of generating return and income but also unleash the value and potential of your money now.

P.S. You may be saving that R100 000 for a rainy day, but when it does rain, will you be able to afford that umbrella?

Benoni resident Roberto Pietropaolo, or Robby P, as he is known in the financial markets, is committed to educate you on financial wellness, investing, and general money matters. He works for Vunani Private Clients, as a trader, investor, mentor and tutor. He specialises in trading the short term derivatives market and longer term equity or share market.