By Evangeline Anumba
“A bank is a place where they lend you an umbrella in fair weather and ask for it back when it begins to rain.” – Robert Frost
Banking is an industry that is hardly understood, even by those who work within its walls. It is often governed both by its own rules and policies and those stipulated by the Central Bank of Nigeria. Its processes are usually unclear and opaque to both staff and outsiders and most times, what they declare as profits have no direct bearing to their activities. It is this opaqueness and insulation to public scrutiny that makes banking the most lucrative business in the world. Most people really do not want to even understand banking and always try to avoid it. Unfortunately, without banks, there will not be mortgages or business loans and all the other specialised services they provide. So we live with it as a necessary evil.
Saving money is the process of putting hard and liquid cash aside in a bank’s safe custody which means that it can be accessed in a very short time.
Investing money is the process of using your money to buy an asset that you think has a good probability of generating a safe and acceptable rate of return over time, making you wealthier even if it means suffering volatility, perhaps even for years. The best investments tend to be so-called productive assets such as stocks, bonds and real estate.
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Saving vs Investment
Saving is usually for smaller, shorter-term goals in the near future, more or less to keep you for the time being. People save basically to have something to fall back on during emergency or towards purchasing an item of value. Investment on the other hand is a well-advised decision towards your path to financial freedom as that is what bears more money than you already have. Instead of keeping your money in the bank, which yields you minimal interest, you are financially better of investing because it bears you more money. Investing therefore helps you achieve bigger and long-term financial goals.
One attribute of successful entrepreneurs is willingness to delay gratification, and investing your money requires you to do that. Being financially savvy means that you never spend out rightly, but put in your profit to make you more money. Saving in the bank basically gives you access to your cash when you need it (except fixed deposit account). It makes it easy for you to easily spend because you know you have it and in the long run you may not be able to point out a valuable thing you did with the money. However, if you decided to invest your money in a business venture or real estate, it will not be that accessible to you to spend compared to a savings account. This is because, sometimes the return from a business does not come immediately, but will come gradually and may serve you for life. Investment basically multiplies your money continuously.
Potential profits of a savings account and investment
Investments have the potential for higher return than a regular savings account. Your investments may appreciate (go up in value) over time. This increases your net worth, which is the value of your assets (what you own) minus your liabilities (what you owe). If you sell for higher price than you invested initially, you make a profit. On the other hand, saving your money in the bank can earn you interest but savings accounts generally earn a lower return than investments.
Inflation and value of money
With your money in the bank, inflation can erode the value by gradually eating away your purchasing power and negates profit. Prices of goods and services and steadily gone up over the years, most especially in the last few months. The direct consequence of this is that the purchasing power of your money goes down. It’s called inflation, and it can really eat away at your future purchasing power. For example, if the inflation rate is 2% annually, then what you could have bought for N100 might now cost N120 just like a bag of Sachet water. So, if you had N100,000 in the bank two years ago, the real value of your money will go down by the same rate of inflation.
Imagine you invested your N200,000 in 30 bags of rice being sold for about N8,000 as of last year and then sold it for N18,000 this year, you would have made more than 100% profit compared to a decline of 2% in real value because of inflation.
Let’s do the maths, N18,000 X 30 = N540,000
This means you would have made a profit of N340,000. So it is important that you understand that when it comes to putting your money in a savings account in a bank, if your money is not growing at a rate which is higher than the rate of inflation, your money is losing value.