One of the worst but most used way is to store your wealth in cash (bank account). It’s wildly popular with heartbreaking consequences.
Traditional way of saving money looks like this:
- Get paycheck
- Save 10-30%
- Deposit in bank on your saving account
- Get tiny interest rate
- Follow systematic investment plan
- Live below your standards
- Save more
- Get mortgage
- Spend half of life to pay back
- Get salary hike
- Save more
- Retire at age 65
- Retired but still poor because of inflation
- Get frustrated
Problem with traditional wealth accumulation system is short life. Difficult to have enough time to accumulate big wealth. In traditional investment advised to play safe. Main idea is to save your base amount and lost investment opportunities. Interest rate not beating inflation especially if you live in country with high inflation rate. For example inflation per year in Congo 41.7%, South Sudan 117%, Venezuela 1,698,488% . Even in developed countries average inflation rate 2.5% per year. That means:
Interest rate-inflation=wealth growth %
All currencies in the world are fiat currency. That means it’s inconvertible, paper or electronic money legally accepted by governments to use. Value maintained by government. Money not backed up by physical commodity (gold, silver) and not exchangeable on physical commodity. Fiat money linked with risk of becoming worthless in any moment. Here’s a few examples how easy and fast money could became just papers:
- Soviet Union’s ruble overnight lost all power and became just printed papers. Same happened with all savings. Overnight all citizens lost lifelong savings.
- Venezuela’s 1,698,488% per year hyperinflation made country dependant on money printing machine and international loans.
- Cuba’s 2 currency: Cuban Peso and Cuban convertible Peso. 1 Cuban convertible peso= $1. It’s single country in the world where dual currency circulate in same time.
- India’s Prime Minister Narendra Modi in 2016 done demonetisation and instantly made 86% of notes in circulation illegal to use.
To understand why printed pieces of paper called money we need to take a look into history:
- Barter in form of physical exchange of products.
- Commodity money in form of shells, animal fur, spices.
- Metallic money in form of standardized metal coins.
- Paper money backed up by precious metals (silver, gold).
- Fiat money which not backed up by precious metals.
- Credit money.
- Electronic money.
- Fiduciary money in form of not accepted by government payment ways such as crypto currency.
Through the history people preferred to use valuable items as middle in exchange. Everything changed in 20th century when idea of money not backed up by metals became accepted. Exchange rate between currencies fluctuate based on government policies and forex manipulations. This leads to change in purchase power. As more money issued as more inflation as more devaluation. Money lose purchase power and that’s why it’s terrible advice to store it on savings account. There’s plenty of options: self education, real estate, land parcels, manufacturing units, intellectual property rights, equity, angel investment, precious metals, collectible items, infrastructure projects etc.
Investment and wealth building is long game which requires deep knowledge in what you invest.
In next article I’ll write about self education as form of investment.