Why Is Your Money Sitting in a Savings Account?

Millennials and the generations that follow are going to be forced to take new avenues toward acquiring wealth.  The “work hard and save” formula that worked for their parents and grandparents may no longer be enough in a complicated global economy.  As recently as the 1970s, a family of four with one adult working at a modest, mid-level job could afford to own a home, put food on the table and take a family vacation once a year.  Try doing that now in Vancouver or anywhere else in North America and you will confront a nearly impossible challenge. The bottom line is that if you are in your 20s or 30s now and thinking ahead to your financial future, you’re going to have to think outside the traditional box.

Think Long and Short Term

If you have already started saving a portion of your income each month, give yourself a pat on the back.  If the money you have saved to date is sitting dormant in a simple savings account, then it’s time to take a closer look and learn the difference between saving and investing.  A healthy savings account is necessary for immediate and short-term needs, but hoarding cash is unlikely to help achieve your long-range goals.

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As every young child with a piggy bank knows, saving involves putting money aside.  You may have goals in mind, such as a vacation, or a new car or down payment on a home.  Savings can also be set aside to cover unforeseen expenses, such as loss of a job or a broken furnace.  Keynesian economists define savings as “what a person has left over when the cost of his or her consumer expenditure is subtracted from the amount of disposable income earned in a given period of time” (Investopedia).  Savings are generally held in the form of cash in designated accounts or low-risk securities. Having easy access to liquid savings is important, but it is advisable to avoid parking excessive sums of cash in simple savings accounts as that money will only languish in an era of low interest rates.  That’s where the importance of investing comes in.

Hoarded Money Loses Value

Investopedia defines investing as “the act of allocating funds to an asset or committing capital to an endeavor with the expectation of generating an income or profit.”  Bear in mind that when money is parked in a savings account or other low interest vehicle, it is often losing value as time goes by since the deposits will most likely fail to keep pace with even modest inflation.  A good saver should be ready to invest once he or she has set aside cash (or other easily liquidated assets) in an amount sufficient to cover at least six months of fixed living expenses. Then you can begin to use your money to make more money.

 

According to an online survey conducted by the Ontario Securities Commission in 2017 among Ontarians ages 18 – 36, 80% of respondents reported that they were saving, but only 50% of the savers were investing.  Interestingly, 59% of those who were not investing claimed they did not understand enough about investing to get started. In assuming such a laissez-faire attitude toward their own finances, these millennials may have forgotten that financial markets move in cycles.  Owing to their lack of financial education and conservative bent toward personal finances, they may end up denying themselves the same access to wealth and lifestyle comforts that their parents are now enjoying. Accumulating wealth through hard work and savings alone is probably no longer practical for most people.

Of course, even the most conservative investments carry some degree of risk.  The best strategy for new investors is to look for investments with minimal risk and strong potential for appreciation.  Investing in real estate through an online platform such as addy is one way to employ the knowledge and expertise of others to choose the right properties. Millennials have one overwhelming advantage when it comes to investing and that is the fact that time is on their side. So much can and will happen in the next 30 – 40 years, so now is the time to get started.

 

 

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