Your Savings, Is it a benefit or trap?

I remember when I was little, my dad brought me to the bank to open a children savings account that granted me a passbook (btw, this is in the early 90s when the term internet is not known in common household) and a piggy bank, which made me excited about the whole idea of savings. My dad will instill the habit of saving money in me by doing it himself. Every day, I would see him taking his loose coins out from his pants and placed them into his piggy bank.

In my late teens, I was exposed to economics study in the university. Little did I know there is a mischievious devil called INFLATION that erodes my savings. It grins at the plentiful savings and consume them at no limit. With this learning, I would like to share some advices, which will be highlighted in bold text.

Wahlau, then why should we be saving lor since savings will be gone anyway with inflation?” As I grew up, I begin to comprehend that savings is crucial for my future but money saved should not be left alone in the bank’s saving account or even in fixed deposit (even worst, in the piggybank or fancy mooncake box under the bed).

The intent of you saving is to generate cash flow for investment!

Like that arh, then what and how should I invest?” Investment is cashflow spent to accumulate assets (as oppose to liabilities) and the assets will generate income for us.

Based on inflation rate of 3.6% (1973 – 2018 avg), your savings should be spent to invest on assets that generate returns more than inflation rate. This means not keeping money in piggy bank or keeping money in the bank’s FD with the following returns

  • Mooncake box, piggybank etc. 0% pa
  • Bank FD ~3.15% pa (2018)

but, look into a suitable financial investment intrument that meets your risk appetite and expected returns

Examples of investment instrument

  • Property 4.13% pa (1997 – 2018 avg)
  • Income equity e.g. ASB ~7% pa
  • Stock market 8.94% (1996 – 2016 avg)

“So, what does this mean in simple terms?You very chim leh!” With $500K retirement fund stored in piggybank for 10 years, you will still have that exact physical amount (with exception of it being stolen or lost) BUT, your $500K buying power will diminish to $360K. Yes! $500K to $360K because of compounding inflation rate. However, if you have placed $500K into an investment instrument that generates 7% pa, your $500K will grow into $983K physically, with buying power of $698K.

Therefore, begin your savings journey with the right intent, beat the mischevious devil (i.e. Inflation) and your wealth will prosper.

Money saved for generating cashflow and cashflow to purchase income generating assets!

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