Saving Won’t Make You Rich, Do This Instead

Too many people advise you to save as much as you can in order to eventually become a millionaire. I don’t think this is the right strategy, and I’ll explain why.

The Principle of Saving

Saving is the part of your money that is not consumed and is put aside. The main forms of savings are:

• “Liquid” savings: This type of savings allows you to access your money immediately. These resources are available and used for day-to-day living. Examples include current accounts, youth passbooks, etc.
• Financial savings: Financial savings enable you to grow your capital and benefit from capital gains: it’s a profitable investment. Financial savings can consist of sums of money placed with a bank, or financial products for real estate investment, which can be financed by the individual himself or through his employer (company).

Why Saving is Inefficient

First, there is inflation. Inflation refers to the general increase in prices over time, which results in the erosion of the purchasing power of money.

Imagine you have $10,000 saved up in a bank account earning no interest. If the inflation rate is 3% per year, the cost of goods and services will rise by 3% annually. This means that after one year, your $10,000 will only have the purchasing power of $9,700. Over time, the effects compound, and your savings will buy even less. Inflation erodes the value of money, making it more challenging to maintain the same standard of living in the future.

To understand the long-term effects of inflation on savings, let’s consider a hypothetical scenario. Suppose you have diligently saved $100,000 over 20 years, aiming to build a nest egg for retirement. However, during those two decades, the average annual inflation rate was 2.5%. As a result, the purchasing power of your savings would have been significantly diminished.

After accounting for inflation, the real value of your $100,000 would have decreased to approximately $67,000. In other words, your savings would have lost nearly one-third of their value in terms of purchasing power.

In addition to inflation, another limitation of saving is the prevailing low-interest rate climate. Central banks often adjust interest rates as a means to stimulate or control economic growth. However, in recent years, interest rates have remained historically low, impacting the returns earned on savings accounts.

When interest rates are low, the interest earned on savings is minimal. Traditional savings accounts often offer interest rates below the inflation rate, meaning that the purchasing power of savings can still erode over time, although at a slower pace.

In the end, saving can’t make you rich, because you don’t make any money. There’s nothing coming in, you’re just putting money aside.

The Solution

Instead of saving $100 a month, why not try increasing your income by $100 a month? As you can see, the solution is simply to increase your income. To “create” money rather than save it for later.

Sure, it’s easy to say, but in reality it can be quite difficult to increase your income. It all depends on what you do for a living.

If you have a traditional job, you have very little leverage over your income (what I call leverage is the ratio of money earned to time worked). In that case, it may be a good idea for you to develop a side hustle, a side business…

For example, if you have a YouTube channel, you already have more levers to increase your income. Let’s say you want an extra €100 a month. For a YouTuber, this translates into more views, or more product placements. And for that, you’ll need to do a bit more work, either making more videos to increase your overall number of views, canvassing companies for product placements, or just waiting with no guarantee of achieving your goal.

In fact, maybe people just choose to save for the easy way out? It’s easier to put aside some of the work you’ve already done than to put in extra work. But as you can see, saving isn’t enough, so let’s get to work!

What About Investment?

To begin with, we need to distinguish between different types of investment. There’s passive investing, where you put your money into something that’s more or less risky, hoping for greater or lesser returns. This type of investment follows much the same principle as savings, except that you invest your money in the expectation of greater returns, but with no guarantee that you’ll see your money again, depending on the risk. In fact, passive investing is high-risk, high-reward savings.

On the other hand, it won’t make you rich either. Let’s say that instead of earning 3% a year from savings, you earn 10% a year from investing in the S&P500. You invest $1000, which comes to $1100 at the end of the year. That’s not much… And you have no leverage to change that. Investing is fine when you’re already rich. If you don’t have a lot of capital, the best thing to do is to increase your income, as I said earlier. And to do that, you need to put your $1000 from the example into an active investment.

What I call an active investment is one that requires work as well as money. Money is the necessary condition, and work is the leverage. To take our YouTuber example again, before he became a YouTuber, he probably had to buy his equipment. He’s invested his money, but it’s not an investment that pays off if he doesn’t do anything with it. On the other hand, if he does the work, he’ll generate views and start earning money. The more work he provides, the more he’ll improve either the quantity or the quality of his videos, which will generate more money.

When he starts to grow, he’ll be able to delegate certain tasks, such as video editing, and earn just as much money with less work. He’s actually increasing his leverage.

In short, active investing is what allows you to gradually increase your income, continuously because as it increases you have the possibility of delegating certain tasks thus increasing your leverage, which I define as the ratio of money earned to time worked.

To take back our example with the $1000, it’s more than enough to buy stuff to start a YouTube channel and make at least $100 in a year.

So, Goodbye Savings?

Not really. It’s always a good idea to save in case you need a lot of money for something unexpected, for example.

But don’t save too much. And don’t save a large part of your income — that’s the important point. It’s not the same to save $100 a month when you earn $2,000 a month or $10,000 a month. In the first case, it’s better to put the $100 into active investment. In the second case, you don’t care about saving $100 because you’ll always have $9900 left over.

Final Note

The concept of saving is basically a bit absurd, I find. Why save $100 a month if you can increase your income by $100 instead? The problem is that many people think it’s difficult to increase your income. And indeed, depending on where you are in life, it’s more or less difficult, but it’s always achievable. In any case, you’ve got to put in the work to make it happen, because without doing anything, it’s clear that it won’t be possible.

In a future article, I’ll talk about some business ideas you can implement to try and increase your income. Active investment ideas, in fact. Follow me so you don’t miss out!

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