I believe most of us have heard of the saying, ‘A penny saved is a penny earned.’ However, is it true that we can profit only through money saving?
It might be true for our grandparents’ generation as banks offered around 10% of interest rate for a fixed deposit (FD) in the 1980s.
Coming back to the year of 2020, the Bank Negara has reduced the interest rate until 1.75%. You might be wondering how the rate cut affects your savings, here’s a scenario to clear your doubt.
Let’s say you have RM 10,000 to be placed for a fixed deposit. During the 1980s, you will get the return of RM 1,000 after a year. Sadly to say, in 2020, with the same RM 10,000, you will only get RM 175 after a year!
This is why our younger generation needs to know more than just saving their money. Money saving alone will not bring them the financial freedom that everyone is dreaming of.
Why Money Saving Alone Is Not Enough
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The most alarming reason why money saving alone is not enough: the inflation rate. If you are just saving your money in low-interest saving account, the value of your money is losing due to inflation.
You will never be able to beat inflation and maintain your current standard of living if you do not make your money grows at a rate that is equal or higher than the current inflation rates.
Looking into your daily expenses, you will know how inflation causes the value of our money diminishes over time. In the 1990s, we can buy a full trolley of groceries with RM 50.
On the other hand, we might only get a few items from our grocery shopping with the same RM 50 in 2020. Even a small cup of Kopi O will tell you that inflation is happening rapidly in our daily lives!
Thus, there is no more excuses for just saving your money. We need to educate our children on financial literacy so that they do not only save their money, but also do not miss the opportunity to grow the money to potentially create wealth.
What Our Children Need to Know More about Money Saving
#1: Money saving is to build an emergency fund and investment fund
Looking into the habit of saving our money, we need to get our children to understand the reasons behind money saving.
Firstly, we save our money to build up our emergency fund. This is to handle any sudden life events such as loss of income sources and unforeseen medical fee.
Get your children to learn to save their emergency fund that is able to cover them for at least 6 months of their living expenses.
Now, what to do next with saving your money? Your children need to be aware that we should not only work hard to earn more money; we also need to get the money to work hard for us!
But before we can get the money to work for us, we must first save our money to build up our investment fund.
Instead of spending lavishly on entertainment, learn to save up a fixed amount of money.
You will then be able to grasp the right opportunity to enter the market as you have the money ready in your savings.
This brings us to the needs to know about the investment options that are available to every one of us.
#2: Open up to investment options with savings
Many of us tend to step away from investment as we think it contains high risk. We will tend to lose our money in investment.
If you are currently having this kind of mentality, you ought to change it NOW and make sure you do not pass on this wrong concept to your children.
The real risk of losing your money is by not investing your money! As we mentioned above, saving your money will only cause the value of your money to diminish as time passes.
On the other hand, investment takes some of your money to buy stocks, bonds, funds and unit trust that can increase in value.
While safeguarding your money against its loss of value, you will have the opportunity to grow your money and wealth.
What are some of the options available for investment then? The options range from high-risk, moderate-risk and low-risk with different rates of return.
It is important to educate our children that we should never put all the money into one investment option and not all high-return investment comes from high-risk investment.
This is from the well-known investor, Warren Buffet:
Risk comes from not knowing what you are doing.
So, make sure you educate your children to always do research on the business that they are interested to invest in. Remember: never ever invest in a business that you don’t understand.
#3: Be committed to budget planning
It is equally important for your children to learn about how to spend their money. As they learn to invest, they also need to learn to set a short-term and long-term goal for their desired lifestyle after getting the profit.
The aim of earning more money is not only to see numbers accumulating in the bank account, it is so that we can enjoy a greater quality of life.
Therefore, by having our children learn to set their short-term and long-term goals in enjoyment, they will be more motivated to save and invest their money!
Here’s the portion that your children can allocate for reward or enjoyment: put 1/3 of the profit each in secured investment, riskier investment and finally in reward.
Everyone Can Be Rich, Just Not With Saving Money
The history has shown us that anyone, from any family background, can equally enjoy financial wealth. Thus, you can be the one who brings positive change to your children’s financial literacy.
Get them to learn more about investment since young so that they know what to do with the money they earn in the future.
All of us can be rich and wealthy if we are clear with how we are going to deal with our money.