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Saving money tends to be considered the gold standard when it comes to personal finance. In fact, the average house in America has a savings account balance of over $8,000. With the average monthly expense of $5,315 the average savings would not even cover 2 months of savings. However, almost half of Americans have over 3 months of their expenses saved up. America has a problem, half need to start saving money, the other half needs to stop saving money.
If you have very little or no savings, this post is not meant for you. Check out a previous post on the importance of saving if you still need sufficient savings. The personal savings rate in 2018 was 8.8%. This is one of the highest personal saving rates that ever existed. That is the good news. The investment rate to GDP is below average at 20.8% while the average rate is 22.5%. People have been saving more instead of investing. If you want to be wealthy, you need to stop saving money and focus on investing instead.
Problem With Saving Money
Saving tends to be seen as a positive thing, and it is. But how does money grow in a savings account? Before you point out in the comments sections that savings accounts accrue interest, even banks with the highest interest rates do not beat inflation. Money in the bank may be considered safe, but it is eroding in value slowly.
You are not getting wealth by saving money, you are not even maintaining wealth by saving. It is slowly fading away.
Invest Money Instead
After you have developed sufficient saving, you should focus more on investing. Investing will not only help you maintain wealth, but to grow it. Many investments do require a minimum investment though. You may have to save money for investments. You should make several savings accounts to have your money properly put aside for certain purchases and future investments.
Why Do People Save More Than Invest?
More than half of Americans say they are saving for retirement using a savings account. Like at a bank. You will not grow any wealth in a savings account, so why do most people do that? The future is full of uncertainty, so you probably feel like the most certain place to put your money is in the bank. Most people claim that money is very safe in the bank. Truth is, banks are not risk-free. I will discuss that in the future. Chances are you are at least a little risk-adverse. You must learn to control and allocate risk.
Furthermore, people can withdraw money easily from a savings account. It is harder to withdraw from investments.
What To Do In Place Of Oversaving
Instead of oversaving, stop saving money and find investments with cash flow. Cash flow investments include dividend paying stocks, and rental real estate. Cash flow can provide money in a readily available account. Regular cash flow can be used in lieu of regular savings.
Saving money tends to be the extent of how many people try to build their wealth. While saving is important, oversaving could be detrimental. Savings will never grow, you will be lucky if it can even maintain value. After you save up no more than 6 months of expenses, you should look into making investments. These investments can be used to forge your wealth.