Saving money and saving money is my thing. On the other hand, investing your savings is something I’m (a little too) slow to do. So I asked Piter, from the blog Plus riche, a savvy investor, to explain to us the interest of investing. Here is his excellent article.
When I started saving money, I was content, like most people, to leave it on my A passbook: it didn’t bring much money, but at least I was sure I wouldn’t lose any (at least that’s what I thought).
As I was young, I made little money through small jobs that didn’t pay very well, and I felt that I couldn’t afford to lose the little I had saved in risky and uncertain investments.
The problem was that then I went to economics school and realized that this strategy was actually the least secure for my savings, and contrary to what I thought, I was actually losing money every year.
Why was I losing money every year? That’s what we’re going to see in the next point.
The 2 forces that impoverish savers (in spite of themselves)
1. Inflation (the devouring force of savings)
I’m pretty sure you’ve heard of inflation. You probably even know what it is. The problem is that, because a smoker is vaguely aware that smoking will kill him or her, and his or her brain may not be able to make a direct connection between the bad habit and the likely consequences, the same thing usually happens when we reason abstractly about inflation. Since we do not directly see the value of our bank account decrease every year, our brain tends to forget that the phenomenon exists. But it is no less real.
By definition, inflation is a loss in the purchasing power of money over time that results in a general, sustained and persistent increase in prices.
The average inflation in France over the last few decades is somewhere around 2% per year, which means that every time you leave your money in your current account, it’s a bit like putting it in a passbook that will bring you -2% at the end of the year. And any investment that pays you less than 2% a year over the long term doesn’t actually make you earn any money: it simply maintains the value of your capital, without making it grow.
And again we are lucky because average inflation has been relatively low over the last few years, but there have been years of 7.8.9% inflation (I refer you to this table if you want more details on the specific historical annual figures).
Fortunately, there are ways to combat this phenomenon (which we will see in the rest of this article), but first, let’s look at factor number 2.
2. Opportunity costs (losses linked to missed opportunities)
Opportunity Cost is a typically economic concept: it represents the amount of money you virtually lose by placing your money on media that are unprofitable or unprofitable. The concept of opportunity cost is often used in finance to compare different investments with each other.
For example if you choose to invest your money in a 0.75% Passbook but there are other investments that yield 5% per year: you are in fact incurring an opportunity cost of 4.25% per year, i.e. a virtual loss of 4.25% each year compared to your neighbour (or your banker) who invests in more profitable investments.
Taking into account this idea of “virtual loss” allows you to have a more realistic vision of the different options and to make more informed investment decisions.
If I talk to you about these 2 notions, it’s because a few years ago, they allowed me personally to become aware of one essential thing: not making any decision about your money is in fact making the decision to lose some for sure.
When taking no risk is the riskiest option
I know it may seem counter-intuitive, but when you think about it, life works that way.
If you don’t take the risk of approaching the girl (or boy) you like, you have a 100% chance of spending the evenings afterwards drinking beers in front of Netflix. In the short term, Netflix doesn’t seem like such a bad alternative. Netflix is safe, Netflix is comfortable, but if you systematically choose this option, the consequences for your long-term social life (and your personal development) will be disastrous.
If you don’t take the risk of going after the job you love, the risk of presenting yourself at stressful and uncomfortable interviews, the risk of starting that business you’ve been wanting to start for years: in the short term you choose comfort and security, but in the long term you compromise your future and slowly and insidiously exchange the life you would like to have for one you hate.
Where am I going with these digressions?
Well, the point is that money works exactly the same way: in the short term the easy solution is to put it in an account that gives an illusion of security, and to choose the solution that requires the least amount of effort. In the long term, you can be 100% sure that this choice will have an extremely negative impact on your finances. And the difference between those who will have made an effort and those who will do nothing will grow a little more each year and eventually become colossal over time. Fortunately, there are solutions.
Solving the problem and rolling up your sleeves
I have another sad truth for you: the only person who really cares about your emotional life, your career and the state of your finances is you.
It’s not your friends, it’s not your boss, and it’s certainly not your banker. So if you want to get results, you’re going to have to roll up your sleeves: no one is going to present you with miraculous investments on a platter (or if they do, you’re likely to have stumbled upon a con artist), so you’re going to have to train yourself and get them yourself.
Beating inflation and choosing the best opportunities
Compared to what I told you earlier, you may now be wondering how to fight inflation and reduce your opportunity costs. Well, it’s simple: you need to put your money into more profitable investments (“No, no kidding!” you might say).
And since you already knew about inflation before you read this article, I’m sure you already know intuitively just about which investment vehicles are really profitable. If you want to beat inflation, there are two in particular: stocks and real estate (not the only ones, but in my opinion the most accessible).
Stocks have earned between 7 and 10% on average per year historically, and the value of real estate increases with inflation, which guarantees that you will preserve your assets over time while collecting rents (which will also increase if inflation increases).
You’ll just have to find out a little bit about what stocks (or funds) to buy, or learn how to find profitable apartments, but believe me, it will be well worth it. Well-invested savings can provide you with a comfortable future, a significant income supplement, and even allow you to retire early if you want to (and do it right). In short: you’ll have options (which is a luxury that unfortunately not everyone has).
Where do you start?
Depending on your personal preferences, I really recommend that you learn about one or the other of the options mentioned above (i.e. the stock market or real estate). I personally work in the financial industry and I can tell you that if you do it right, these are two investments whose returns are hard to beat, and for which the returns can be substantial for a fairly low level of overall long-term risk.
Of course don’t go in blind. Start small. Take it one step at a time. But get informed, take the plunge, and please don’t let your money sleep in accounts that don’t earn you anything: your future you (and your children) will thank you for it for sure. Think of every euro you save as a small employee who has to work hard for you, not as something you forget in the corner. You have worked hard to earn this money: make it productive.
I hope this article has been useful to you, and if you have any questions or comments, feel free to post them in the comments section just below.