Becoming rich is just a matter of accumulating enough assets, but can you get there through saving?
No, saving money can not make you rich. You need to invest your money. The reason is that savings grow linearly while investments grow exponentially due to compound interest.
I’ll give you a bunch of examples and charts later in the article, but first, a principle you need to burn into your brain:
Saving money is a losing strategy that imprisons the poor and middle class.
I first understood this by reading Robert T. Kiyosaki’s 1997 book “Rich Dad, Poor Dad“:
“Rich people acquire assets. The poor and middle class acquire liabilities that they think are assets.”– Robert T. Kiyosaki
He defines “assets” as “things that make you money” and “liabilities” as “things that cost you money”.
Now here’s an essential fact you need to understand:
Savings depreciate over time due to inflation and is therefore a liability!
Saving money, therefore, keeps you in the poor and middle class, as you think you’re building up assets, but in reality, you accumulate liabilities.
Here’s what pro wealth builders do: First, save up a safety net of 3-6 months of expenses, then invest the rest!
“Investing” means buying assets – things that make you money either through generating cashflow (things that regularly make you more money) or capital gains (things that go up in value).
This way, you’re harnessing the power of compound interest, which can make you truly rich.
Suggested reading: Is Saving/Investing 20% Of Your Income Enough?
Why Saving Your Money Can’t Make You Rich
Let’s start with an example comparing saving and investing $8000 a year over 40 years.
Visually, you can see that investing is way more powerful than saving. Here are the numbers:
- Saving $8,000 a year for 40 years turns into $320,000.
- Investing $8,000 a year for 40 years turns into $1,600,000
In other words: Compound interest makes investing five times as powerful as saving over a 40-year period.
To reach $1,600,000 without investing, you actually need to save $40,000 annually. That’s almost the median wage in America.
Suggested reading: The 4 Steps To Save A Lot Of Money Fast
Another example, taken from my article on how much you should save per day:
To reach $2,125,000 in 41 years, you can either save $142 or invest $26 per day. Saving that much per day is unrealistic for most people, but investing $26 per day is achievable.
To Become Rich, Stop Saving Money
To further underscore the point, I’ve made a table showing how much saving different amounts of money will turn into over a 40-year period:
|Amount Saved Annually||Over 40 Years|
As you can see in the table above, becoming a millionaire by saving money takes $25,000 a year over 40 years. That’s the same as saving $2,083 monthly, for 480 months.
Although it isn’t impossible to become rich by saving money, you’ll have to save tens of thousands annually for several decades. That’s not realistic for most people.
Most people struggle even to save $1,000 a month ($12K/year), which would only amount to $480,000 over 40 years.
Think about that; saving $1,000 a month through your entire working career wouldn’t even amount to half a million dollars.
On the other hand, to reach $500,000 through investing in index funds, you only need to put in $203 a month.
To reach $1,000,000 through investing in index funds, $405 a month will get you there.
Suggested reading: How Much Should YOU Save Per Year? (Examples and Charts)
Conclusion: No, Saving Money Won’t Make You Rich
To save your way to a million dollars you need to save $25,000 or more annually for 40 years. That’s unrealistic for most people, given the median income in America of roughly $54,000. (source) Saving almost 50% of your pre-tax income is just not an option for most people.
What differentiates the rich from the poor and middle class is that rich people acquire assets, and the rest acquire liabilities they think are assets. Savings is an example of this; due to inflation, it loses value and is, therefore, a liability. Thus, you should not save money to become rich, but instead, invest your money in assets like rental properties or index funds.
Investing in index funds with annual returns of 7% per year for 40 years, you’ll be a millionaire with as little as $405 a month. Over a 40-year period, investing is five times as powerful as saving when it comes to building wealth.
Suggested reading: How Much To Save Before Moving Out: The Definitive Answer
Hope you found it helpful!