Ever dreamed of becoming rich? Who would not want to be financially independent, not have to worry about job security, enjoy a couple of millions in the bank, and simply live a life free of any financial constraints? It is ever more surprising, however, that only very few make decisions that would accelerate their journey to financial independence.
According to a recent survey by J.P. Morgan, only 14 % of savers are satisfied with the returns from their savings. 67 % are genuinely dissatisfied with the growth of their wealth. The reason for the latter was the low return from their investments. J.P. Morgan states the example of Germany, one of the richest countries in the world. In Germany, more than 2,200 billion Euro are being kept in low-interest paying savings and checking accounts. That is € 26,506, on average, per person. Given current interest rates on savings, the dissatisfaction is not very surprising. With most savings accounts paying no more than a meager 0.1 % or even less, the return of the average savings pot of € 26,506 is a mere € 26 per annum. Think about that, you worked hard, saved religiously, amassed a five-figure savings pot and are rewarded with just enough for one dinner - for a whole year of leaving the money with your financial provider. My bank in the UK just announced an interest rate cut to a ridiculously low 0.01 %. If I was to keep the average German savings pot in my account, I would earn 2.6 Euro. Not even enough for a coffee (that is, if Covid was behind us and we were allowed back in cafes). Thus, hardly worth the effort and certainly no way of growing my wealth.
J.P. Morgan gives another figure: 632.1 billion Euro. That is the amount German citizens have invested in the stock market. That is € 7,610 per person. A fraction of what is being held in low-interest savings accounts. Not only is that number slightly less than one third of the amount kept in low-interest paying accounts, but it is the reason for why the citizens of one of the richest countries in the world don't rank very high on the wealth scale. Of course it is crucial to keep some money in easily accessible accounts, but building wealth is impossible when simply leaving it lying around instead of putting it to work for you.
Accelerate your wealth building
If you have read about one of the reasons for why I initially started Captain Finance, you surely know why those disciplined savers don't put their money to better use. Many feel that they lack the necessary knowledge. In particular when it comes to shares. 34 % of respondents in the J.P. Morgan survey stated they do not understand the stock market and shares. This was followed by fear. 27 % of savers were too concerned about potential losses and volatility. The truth of the matter, potential losses only arrive from falling victim to being too hasty when faced with market volatility. A paper loss, thus a loss that exists purely on paper, is nothing to lose sleep over. Only realized losses are cause for concern. All of this, obviously assumes one has done the proper research and invested in a company, commodity, property, or else that they truly understand and have done their due diligence.
There is another reason preventing those savers from becoming rich and that is certainty. Knowing precisely the interest rate the savings account earns, even if it is close to zero percent, appears to outweigh the multitude of possibilities in the stock, bond, commodities, or property market. This, however, is only the perceived certainty, as banks may change the interest rates paid on your savings at any time. Of course, there is the important aspect of safeguarding your money and preserving your savings. However, this is merely an illusion, as due to inflation, even the supposedly preserved cash amount does not retain its original value. Just assume the current inflation rate in many Western countries of 1.5 %. The disciplined savers will lose 1.4 % per year instead of earning any return from their savings. This does, by no means, mean that putting your money in any type of investment is a good idea. Again, research is key. You wouldn't buy a smartphone, car, or even jeans without doing some research on its quality, specs, or durability either.
There are two more reasons that those highly disciplined savers are left with little to no return. It's the fallacy of underestimating how many years your money can actually work for you. I am not talking about compound interest. Although that is another secret to building substantial wealth. I am referring to potential downturns and the subsequent upswings in the market. Just take the last few months. Markets across the globe plummeted with such speed that most were left flabbergasted, looking on in disbeliefs, panic selling dominating the markets. The bear market, however, was followed by an amazing recovery with many stock markets climbing to historic new highs.
Depending on your age, your investment horizon may be years or decades. If so, then any downturn, even with a prolonged bear market of one or two years, will not harm the overall performance of your investments. Your stock portfolio, property value, or gold investment will recover and reward you with a much greater return than if you had left it in a low-interest savings account - no matter how safe it may seem.
To give you an idea of the enormous difference and the "secret" to becoming rich that those disciplined savers are missing out on, check out the following comparison on how long it takes for your money to double in value.
Building wealth - Double your money
Currently most savings accounts, whether that is in the USA, the UK, Germany, France, in fact, most of Europe, are near zero or even negative. The Bank of England, for instance, is exploring the option of negative interest rates for the first time ever. The Bank of England would not be the first to introduce negative interests on savings (for clarity's sake: The BoE, obviously does not impose negative interest on savings, banks will pass on negative base rates to their customers - they are free to do so and your bank might opt to not charge you for saving with them. Reads ridiculous, does it not, being charged for saving with your bank?). The ECB has punished savers for years to, as they claim, stimulate the economy.
But back to the topic of building wealth as there is little any of us can do about central bank policies. Here a few examples for how long it would take to double your money. Let us again take the average savings pot of € 26,506.
Number of years (rounded) for your money to double
I guess most of us will not live to see their money double at 0.01 %. 6,932 years is donkey's years. At 7 %, however, you will get to see your wealth double in just over ten years. Whether you invest that money for your children, grand children, or yourself, you can easily see your principal grow two, four, eightfold - without ever adding an additional pound, euro, or dollar.
If you want to give it a try, put your own numbers in the calculator below to see how much and how quickly your wealth will grow.
Calculate your own future wealth
The secret to building wealth
The secret to building wealth and becoming financially independent is really no secret. It is simply due to the difference in yield. Anyone forced to almost wait 7,000 years before their money doubles would surely be unhappy with the performance of their savings and investments.
If you think that 7% is out of reach, maybe you find comfort in reading that the S&P has rewarded investors with 9.2% per year over the last 140 years. The German index Dax has returned an annual average of 7.5% since its inception in 1988, the French CAC 40 would have increased your wealth by 7% per annum since 1987. In fact, I chose 1987 as the start date, because it was a year when the CAC 40 crashed by over 28% skewing the average returns downwards. If you had invested just a few years earlier in 1983, the average annual return would be over 10%. Thus, even with a terrible year in the mix, cash is still not king over the long-term. At least not when it comes to building wealth. The FTSE 100's annual return since 1984 is similarly impressive. Without dividends reinvested, the UK stock market would have made you 7% richer each year, including dividends almost over 8.9%.
If fear, lack of knowledge, or lack of time to research investment opportunities is what keeps you from putting your money to work, an ETF might solve all these problems. They cover a large number of companies, even nations and industries, eliminate the need to research and follow single companies, and greatly minimize the risk of placing your money on the wrong horse. You can equally invest in ETFs or other types of funds (such as REITs) that give you exposure to properties, commodities such as oil or gold, or municipal, government, or corporate bonds. If you are new to ETFs, check out the article on what ETFs are and how they work. You could even try your luck and bet on cryptocurrencies - however, as far as I am concerned, they are not really an investment, but a gamble. Although, no more of a gamble than speculating on any other currency - neither have any real intrinsic value in that they do not produce anything and are worth only what others are willing to give you in exchange for one bitcoin or dogecoin. That, however, holds equally true for dollars, pounds, euros, yen, or any other fiat currency.
Whatever asset class you choose, cash savings are, given current rates, the least likely to help you build wealth.