Finance 101: Are you really saving money?

My parents have taught me to save money since I was really young.

They would teach me to put the money I received every Chinese New Year in the bank instead of spending it.

Though the amount I save each year wasn't a lot but that figure grew each year until I finally felt like using it, I had a lot of money!!

Saving money is a good habit - This statement is valid in the 20th century.

What about the 21st century? Times change, should our perspective and habits change too?

Robert T. Kiyosaki, author of "Rich Dad, Poor Dad" said this is one of his videos.

That's right. The truth hurts!!

Lets do some thinking here, to what extend do you agree/disagree with this statement?

Share your thoughts (:

Here's my take on this.

One of the easiest (and most commonly used) method of saving money is to put your money into a bank.

If you foresee that you would not be touching that money for a certain period of time (be it short or long) you may put it in a fixed deposit account and gain some interest.

How many of you once had a piggy bank?

Doesn't seem that bad now, right? Having to save your money and earn some extras.

The story doesn't end here. Most of you may notice that the price of goods changes from time to time.

Most of the time, the figures on the price tags seem to increase rather than decrease.

This means that things are getting more and more expensive!!

I believe we have a term for this phenomenon, its called inflation.

How does inflation create a major impact on us?

Most of us do know the existence of inflation, but are oblivious to the seriousness of it.

Yes, it is not a big deal when the price of your favourite brand of soda increases by 10cents (or 10p in UK and 10sen in Malaysia)

What if this continues for 10 years or maybe 20?

Try finding something you use everyday (e.g. soap) and compare its current price with the one 10 years ago. How many percent increment did it experience? Has anything changed other than the price? (like the concentration/weight/size etc)

Inflation is a pain in the bottom. It dilutes our purchasing power greatly but only let us feel little effect.

Let's add some figures to this case to give a clearer idea.

A fresh graduate in Malaysia typically earns RM28,000 a year.

Assuming he/she puts 50% of the money which is RM14,000 into the bank earning 2.5% interest.

(Do note that this is just a simple case. It's not that simple in reality has you will only be able to save RM14,000 over a year's period, not immediately)

According to the CIA Factbook, Malaysia's CPI(Consumer Price Index aka Inflation rate) is 3.3% for the year 2011 with 30% of the price of goods are controlled.

If we ignore the fact that the price of many daily consumables are controlled, the price of goods would increase by 3.3% within 2011 and the bank will give you 3% interest for the amount you saved.

This means inflation rate is higher than the amount you gain by 0.3%.

So, are you really saving money, or are you actually losing more money as you save?

NOTE: CPI for UK is reported at 4.5% for the year 2011 and the risk-free rate is only 0.5%. This means that you may be losing 4% in buying power!!

Like I've said earlier, there may be people who know about the existence of inflation but they may not know how serious it impacts our lives.

We are not to be blamed as we live in a system where were are "programmed" to be okay with constant increase in price.

However, it would be beneficial as we start waking up and find ways to safeguard our hard earned money.

So..where and how can we begin to look for ways to safeguard our money?

That will be in my next post, Finance 102. Stay tuned for it.

One last thing..

Please do not just accept everything/anything that I've said. Do your own research and see what you find.

After all, I'm just a 25 26 year-old who owns a blog.

Just another interesting trivia.

Are you actually saving more money when you purchase discounted items, or are you just spending less?

I don't see the figures in my bank account increase as I purchase discounted items but rather the figure seem to decrease.

Purchasing items at a lower price may not seem to save you money, it just adds value by reducing the cost for you. Either way, you're still SPENDING money.

I can't imagine how much I've spent (unnecessarily) in this website

I hope that you'll have an enjoyable journey in managing your own money from now on *smiles*

- Signing Out -

Leslie Khor